Method of securitizing a portfolio of at least 30% distressed commercial loans

ABSTRACT

A platform and a securitization methodology that provides lenders with an opportunity to maximize the returns on their distressed commercial credit facilities and overcomes the obstacles that have historically precluded the securitization of distressed commercial loans. The present invention is based upon an underlying portfolio of at least 30% distressed commercial loans for securitization that emulates the predictability and regularity of the cash flow and recovery characteristics of a portfolio of generally performing commercial loans, thus eliminating crucial historical barriers to securitization of such distressed commercial loans, such as the absence of predictable and regular cash flows and predictable recoveries. The methodology of the present invention takes a specific mix of distinct classifications of distressed commercial loans with specified characteristics in confluence with structural specifications, such as specific reserves and safeguards, to create a synthetic asset class that emulates the characteristics of a portfolio of performing loans.

CROSS REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.10/621,443, filed Jul. 18, 2003, which is a continuation of U.S. patentapplication Ser. No. 10/053,925, filed Jan. 18, 2002 (now U.S. Pat. No.6,654,727, issued Nov. 25, 2003), and claims priority of U.S. PatentApplication No. 60/334,344, filed Nov. 29, 2001, the contents of allincorporated herein by reference.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates generally to asset securitization and,more particularly, to a system and method for use in securitizing aportfolio of at least 30% (and up to 100%) distressed commercial creditfacilities, such that all of the securities above the equity orequity-like tranches issued by a bankruptcy-remote special purposeentity to finance the acquisition of the portfolio of distressedcommercial credit facilities are eligible to receive investment graderatings.

2. Description of the Prior Art

A credit facility is considered “distressed” if the borrower's financialability to honor its obligations comes into question. Common indicatorsthat a borrower (or group of related borrowers, hereafter referred tocollectively as the “borrower”) may have financial difficulty inrepaying its debt include a breach of financial covenants, a payment ortechnical default of other debt obligations, or a trading value for theborrower's debt significantly lower than other debt with similar couponand maturity features. Not all distressed credit facilities are indefault (e.g., as recognized by Standard & Poor's (“S&P”), a company maybe current on its bank loan obligations while being in technical orfinancial default on its other subordinated debt, resulting insignificant near-term risk that the borrower will ultimately default onits obligations) (Albulescu, Henry, Bergman, Sten, and Leung, Corwin,“Distressed Debt CDOs: Spinning Straw Into Gold,” S&P StructuredFinance, May 7, 2001, hereafter, “Spinning Straw Into Gold”). As usedherein, “distressed credit facilities” and “distressed loans” are thosecommercial loans in which there has been a default by a borrower to makea payment or payments to a lender and/or a likelihood of a default hasbeen identified by a lender in connection with the borrower's obligationto make a payment to the lender.

Distressed loans are known to be subject to increased monitoring and maybe subject to special accounting treatment. If a lender is a bank orother regulated entity, such distressed assets may subject the lender toincreased capital requirements and regulatory scrutiny.

Lenders previously have had a limited number of alternatives for dealingwith distressed credit facilities. One alternative is for the lender tocontinue to hold its distressed credit facilities. This option, however,imposes a number of additional costs on the lender. For example, alender who retains distressed assets may need to employ specializedpersonnel and/or commit other management resources to manage and handlework-outs of the distressed loans, and establish appropriate reservesfor loss contingencies. The process of working with problem borrowers torecover on distressed credit facilities is time-intensive and requiresspecial skills and resources of a lender, often not readily orplentifully available to the lender on a cost-effective basis. If thelender is a bank or similarly regulated entity, the lender may need toestablish reserves to ensure the lender's compliance with applicableregulatory requirements. Retaining distressed assets may further riskgiving interested third parties, such as regulators, stockholders andfinancial analysts, a negative perception of the lender's portfolioquality and management acumen, and may expose the lender to potentialfurther loss if a distressed borrower's creditworthiness continues todeteriorate. In addition, in the case of revolving loans where a lenderhas approved a line-of-credit for a borrower, the lender may have acontingent obligation to lend additional monies to an already falteringborrower.

Another alternative traditionally available to the lender is to sell adistressed credit facility to “vulture” investors at a cash pricerepresenting a significant discount to the outstanding principal. Thisalternative may eliminate applicable regulatory pressure on the lendercaused by the presence of the distressed credit facility on the lender'sfinancial statements and may also eliminate the lender's risk of futurelosses from the credit facility. However, it is a costly remedy becauseof the immediate and likely steep losses that the lender incurs as aresult of the sale at a discount.

Traditionally, there has been little market for a “one-by-one” sale ofdistressed credit facilities; to the extent such a market has existed,it has been characterized by punitive pricing and illiquidity.Middle-market syndicated loans (i.e., aggregate credit facilities ofless than $100 million, for example, with five or fewer lendersparticipating in any of the credit facilities) and single-lenderfacilities often can be sold only to predatory investors in bulk-loansales at substantial discounts, again resulting in steep losses to thelender. Loan losses from such sales not only have obvious economicrepercussions, but also generally have unfavorable effects on thefinancial institution from the perception of interested third parties(e.g., regulators, investors and financial analysts) who may interpretthe loan losses as an indication that the lender's assets generally areof poor quality and that the management of the lender is imprudent orincompetent. As a result, lenders, hoping to minimize their losses,often resort to the liquidation of borrowers with distressed creditfacilities at much reduced recoveries.

Each of these options has a number of significant disadvantages for alender. Consequently, lenders historically have been forced to weighdistasteful alternatives with a goal of developing a strategy forhandling distressed credit facilities that a lender believes to be theleast onerous. Because virtually any portfolio of outstanding creditfacilities is likely to include some distressed credit facilities,lenders almost invariably are required to devote substantial time andcapital to developing and implementing acceptable strategies forhandling their distressed credit facilities.

Securitization of distressed credit facilities has previously generallybeen unavailable as an alternative for lenders. In a traditionalsecuritization of commercial or corporate credit facilities and/or highyield loans, a portfolio of generally performing credit facilities,characterized generally by regular cash flows and predictablerecoveries, is sold by a lender or lenders to a bankruptcy-remotespecial purpose entity (an “SPE,” e.g., a bankruptcy-remote specialpurpose trust, corporation or limited liability company) that financesthe purchase by issuing asset-backed securities, (e.g., notes or bonds)and equity and/or equity-like securities to its investors. “Bankruptcyremote”, as used herein, has the meaning common in securitizationtransactions of an entity which, due to governance provisions in itsorganizational documents, agreements with equity owners and creditors,or other measures, is less likely to be subject to a petition inbankruptcy than a normal operating company. The underlying pool ofgenerally performing credit facilities is used to secure orcollateralize the asset-backed securities issued to investors in the SPEand/or to the lender or lenders from whom the credit facility pool isacquired. Heretofore, securitizations of commercial credit facilities orhigh yield bonds have been comprised principally of relatively highquality collateral with predictable and scheduled interest and principalpayments, thus assuring predictable and regular cash flows andrecoveries. The asset-backed senior and mezzanine debt instrumentsissued by the SPE in a securitization of such commercial creditfacilities or high yield bonds are known to have received investmentgrade ratings (e.g., ratings of Baa2/BBB-, or better) from credit ratingagencies (e.g. S&P, Moody's Investor Services (“Moody's”) and Fitch,Inc. (“Fitch”)) based upon the predictable, regular stream of cash flows(i.e., interim payments of interest and principal) and the predictablerecoveries (i.e., actual aggregate payouts of interest and principal)generated by the underlying debt asset pool, resulting in a high degreeof certainty that the SPE can meet in a timely manner all of its debtservice obligations, including principal and interest. The achievementof such investment grade ratings for the asset-backed senior andmezzanine debt securities issued by the SPE allows the SPE to financethe acquisition of the credit facility portfolio on a cost-effectivebasis (investment grade securities generally bearing a significantlylower interest rate than non-investment grade securities and generallybeing more easily sold in the marketplace).

On the other hand, portfolios which include, for example, 30% or more ofdistressed commercial credit facilities previously have beencharacterized by the unpredictability and irregularity of their cashflows (sometimes referred to as “lumpiness”) and recoveries resultingfrom the low quality of the distressed debt assets comprising asubstantial portion of (or all) the portfolio. Prior to the presentinvention, this unpredictability and irregularity of cash flows andrecoveries has precluded lenders from securitizing such a portfolio ofdistressed credit facilities on a cost effective basis, because of theinability to obtain all investment grade ratings for the asset-backeddebt securities issued above the equity or equity-like tranche ortranches and used to finance the acquisition of the distressed creditfacility portfolio. As used herein, the phrases “equity or equity-liketranche or tranches,” “equity or equity-like tranches,” “equity orequity-like instruments,” “equity or equity-like securities” or words tosimilar effect include, for example, non-investment gradepayment-in-kind (PIK) securities, securities whose tax characterizationis uncertain, securities without a capped return, and securities thathave a yield that is not commensurate with having an investment graderating. Without the ability to obtain investment grade ratings, it wasimpractical for a lender to securitize a portfolio of distressedcommercial credit facilities because it would be too costly to supportthe interest cost of the asset-backed debt instruments issued in thesecuritization above the equity or equity-like instruments issued(investment grade securities generally bearing a significantly lowerinterest rate than non-investment grade securities).

Credit rating agency ratings for asset-backed securities are determinedbased on various parameters including cash flow modeling of the proposedtransaction, stressing defaults and their timing, recovery rates andtheir timing, and liquidity needs. However, while the fundamentals ofthe rating process remain the same, the analytical emphasis and theassumptions used for rating a portfolio of 30% or more distressed creditfacilities differ in response to the specific characteristics ofdistressed debt. (See, “Spinning Straw Into Gold.”) For example, atypical SPE involved in a securitization of performing commercial creditfacilities is stressed by a credit rating agency based on defaults andtheir timing. However, for an SPE whose underlying assets include 30% ormore of distressed commercial credit facilities, a substantial portionof the loans in the pool are either already defaulted or expected todefault. Thus, stressing defaults as a principal focus would notproperly demonstrate the likely performance of the portfolio. Rather,recoveries, which are the primary driver of performance in a portfolioof distressed commercial credit facilities, are also stressed with thelevel of stress depending upon the credit rating sought.

Prior to the present invention, there has not been a system and methodto achieve all investment grade ratings for the asset-backed securitiesabove the equity or equity-like instruments an SPE issues to itsinvestors and/or the lender or lenders as part of the purchase price forthe portfolio of distressed commercial credit facilities, and thus therehas not been a system or method to achieve pricing for thesecuritization of a portfolio of 30% or more distressed creditfacilities comparable to that of a securitization of a performing loanpool. Investment grade ratings for the asset-backed securities issued bya distressed debt SPE result in a low cost of capital for the SPE, whichallows the SPE the time to achieve the necessary recoveries on theunderlying distressed assets and allows for ease of placement of theSPE's asset-backed securities in the marketplace in a manner and atprices comparable to those of SPEs whose underlying assets areperforming commercial credit facilities or high yield bonds. Thus, thereis a need for a method for securitizing a portfolio which includes, forexample, at least 30% or more of distressed commercial credit facilitieson an efficient cost-effective basis.

SUMMARY OF THE INVENTION

The present invention offers a platform and a securitization methodologythat provides lenders with an opportunity to maximize the returns ontheir distressed commercial credit facilities and overcomes theobstacles that have historically precluded the securitization ofdistressed commercial credit facilities. The present invention is basedupon an underlying portfolio of at least 30% (and up to 100%) distressedcommercial credit facilities for securitization that emulates thepredictability and regularity of the cash flow and recoverycharacteristics of a portfolio of performing credit facilities, thuseliminating crucial historical barriers to securitization of such creditfacilities, such as the absence of predictable cash flows andrecoveries. The methodology of the present invention takes a specifiedmix of distinct classifications of distressed credit facilities withspecified characteristics in confluence with structural specificationsfor an SPE, such as specific reserves and safeguards, to create asynthetic asset class that emulates the cash flow and recoverycharacteristics of an SPE containing a portfolio (which may be ofdissimilar size) of performing credit facilities. As such, the portfolioof distressed credit facilities is amenable to securitization and theissuance of asset-backed debt securities (above any equity orequity-like tranche or tranches of securities issued by the SPE) all ofwhich are eligible to receive investment grade ratings.

According to one aspect of the present invention, an SPE purchases aportfolio of at least 30% (and up to 100%) of distressed commercialcredit facilities from a lender for an aggregate purchase pricecomprised of (i) a cash purchase price comparable to what the lenderwould have received in a bulk sale into the marketplace, or realized ona net, discounted cash flow basis if the lender had retained thedistressed credit facility portfolio and utilized its internal workouteffort, and (ii) an additional investment grade asset or assets with avalue on the date of purchase, for example, in the range of 10-15% ofthe face amount of the aggregate funded amounts included in thedistressed credit facility portfolio.

The benefits of the present invention to a lender include theimprovement of important financial ratios monitored by credit ratingagencies and financial analysts, such as the ratio of non-performingloans to assets, the ability to free up valuable economic and regulatorycapital and the opportunity to outsource the time-intensive andresource-expensive workout effort. Given identical default and recoveryparameters (e.g., 50% of the loans will be in default of currentinterest payments within 18 months; those that have defaulted will notpay interest for two years; those that default will recover at best, forexample, 60% of par (face) value; and those that do not default willrecover, for example, 85% of par value), the methodology of the presentinvention provides a lender with a more cost-effective alternative thanmaintaining the distressed commercial credit facility portfolio on itsbalance sheet and utilizing its internal workout effort to manage andcollect the loans.

The present invention also allows the lender to replace the distressedcommercial credit facilities on its balance sheet with cash andinvestment grade assets with an aggregate value likely to besubstantially greater than the amount the lender otherwise would havereceived in a “straight sale” for cash to a distressed asset investor orother third party. Furthermore, the methodology of the present inventionalso allows a lender to remove distressed commercial credit facilitiesfrom its balance sheet with the opportunity of receiving economicbenefits likely greater than would be realized on a net discounted cashflow basis through internal workout efforts by the lender if the lenderhad retained the distressed assets.

BRIEF DESCRIPTION OF THE DRAWING

These and other advantages of the present invention will be understoodwith reference to the following specification and attached drawingwherein:

FIG. 1 is a block diagram of a process for securitization of a portfoliowith 30% or more distressed commercial credit facilities in accordancewith the present invention.

FIG. 2A is a block diagram which illustrates the process of selectingcredit facilities from a lender's portfolio to develop a tentativeportfolio of credit facilities for securitization in accordance with thepresent invention.

FIG. 2B is a block diagram which illustrates the process of evaluatingthe credit facilities in the tentative portfolio to determine whetherpredetermined criteria are met relating to borrower diversity andconcentration.

FIG. 2C is a block diagram which illustrates the process of furtherevaluating the credit facilities in the portfolio to further determinewhether predetermined criteria are met relating to industry diversity.

FIG. 2D is a block diagram which illustrates the process of furtherevaluating the credit facilities in the current portfolio to determinewhether the predetermined criteria are met relative to industryconcentration.

FIG. 3 is a block diagram illustrating the processing of loandocumentation and development of a securitization model in accordancewith the present invention.

FIGS. 4 and 5 are block diagrams which illustrate exemplary loandocumentation to be obtained by the collateral manager in connectionwith a securitization of at least 30% distressed commercial creditfacilities in accordance with the present invention.

FIG. 6 is an exemplary block diagram illustrating a database model fororganizing borrower data for use with the present invention.

FIGS. 7A-7C, 8 and 9 are exemplary block diagrams illustrating adatabase model for organizing loan information for use with the presentinvention.

FIGS. 10A-10K are exemplary block diagrams illustrating a database modelfor organizing borrower financial data for use with the presentinvention.

FIG. 11 is an exemplary block diagram illustrating a database model fororganizing general pricing parameter data for use with the presentinvention.

FIGS. 12A and 12B are block diagrams illustrating the process ofdetermining valuation criteria in accordance with the present invention.

FIGS. 13A-13G are block diagrams illustrating the process of determiningthe collateral coverage and also illustrate a database model fororganizing the collateral coverage data in accordance with the presentinvention.

FIGS. 14A-14D are block diagrams illustrating a database model fororganizing the borrower's debt capacity data in accordance with thepresent invention.

FIGS. 15A-15I, 16A-16C are block diagrams illustrating an exemplaryprocess for determining work out parameters in accordance with thepresent invention.

FIGS. 17A-17E illustrate exemplary due diligence reports for use withthe present invention.

FIG. 18 is a block diagrams illustrating the process of constructing arating model in accordance with the present invention.

FIG. 19 is a block diagram illustrating the process of preparing summaryloan information in accordance with the present invention.

FIG. 20 is a block diagrams illustrating the process of evaluatingwhether the distressed credit facility meets basic performance criteriain accordance with the present invention.

FIGS. 21A-21D are block diagrams illustrating the process ofconstructing an SPE capital structure in accordance with the presentinvention.

FIG. 22 is an exemplary spreadsheet representation of the SPE capitalstructure in accordance with the present invention.

FIGS. 23A and 23B are block diagrams illustrating a process forspecifying default/recovery scenarios in accordance with the presentinvention.

FIGS. 24A-24D are block diagrams illustrating a process for generatingcash flows for the default/recovery scenario specified by the collateralmanager in accordance with the present invention.

FIGS. 25-39 are block diagrams illustrating the process of providingcash flow waterfalls for the securitization of a portfolio of at least30% distressed commercial credit facilities in accordance with thepresent invention.

DETAILED DESCRIPTION Overview of the Process

The methodology of the present invention includes: (1) a portfolio ofperforming (if any) and at least 30% distressed commercial creditfacilities selected to meet predetermined borrower and industrydiversity criteria; (2) a self-amortizing and static SPE; (3) amechanism to fund any unfunded revolver commitments; (4) a methodologyto provide additional liquidity to certain borrowers; (5) a model andstructure that aggregates the anticipated cash flows and whichfacilitates the requisite credit rating agency stress tests premisedupon multiple default and recovery assumptions; (6) a methodology forthe determination of optimum levels of interest reserves that ensure thetimely repayment of interest on the investment grade debt issued inconnection with the securitization of the underlying portfolio ofdistressed credit facilities; and (7) a capital structure designed inclasses (or “tranches”) and sized for receipt of investment graderatings on all of its asset-backed debt components (above any equity orequity-like securities the SPE may issue).

A high-level overview of a method of developing a securitization modelfor portfolios with at least 30% distressed commercial credit facilitiesin accordance with the principles of the present invention isillustrated in FIG. 1. The following description, which is to be viewedas illustrative only, is premised upon a portfolio of credit facilitiesof a lender or lenders containing at least 30% (and up to 100%)distressed commercial credit facilities and upon establishing a capitalstructure or securitization within an SPE collateralized by theportfolio of credit facilities. These procedures are expected to beperformed by the manager for the securitized portfolio (such managersmay act as structuring consultants, administrators for the SPEs andcollection agents for the credit facilities (referred to hereafter asthe “collateral manager”)). The method of the present invention makespossible the securitization of such a portfolio of assets with highlyunpredictable and irregular cash flow characteristics and highlyunpredictable recoveries resulting in the issuance of one or moretranches of investment grade debt instruments to investors and thelender (in addition to the cash purchase price paid to the lender forthe distressed credit facility portfolio), notwithstanding thedistressed state of the underlying collateral pool.

Initially, in accordance with the principles of the present invention, atentative portfolio of at least 30% distressed commercial creditfacilities is selected for sale by a lender or lenders in connectionwith a proposed securitization, as illustrated in step 100 in FIG. 1 andas described in more detail below in connection with the illustrativeexample in FIGS. 2A-2D. Thereafter, appropriate due diligenceinformation regarding the selected credit facilities in the initial,tentative portfolio is obtained by the collateral manager from thelender and stored in a database, for example, a collection of templates,one for each credit facility in the initial, tentative distressed assetportfolio in step 102 (step 170 in FIG. 3), as described in more detailbelow in connection with the illustrative example in FIGS. 3-11. Thedata is selected based upon on analysis of applicable credit ratingagency studies regarding cash flow and recovery statistics of seniorsecured commercial loans in a manner that provides the lender, thecredit rating agencies and any insurers of the investment gradeasset-backed securities issued in connection with the securitization,with the information commonly used in connection with pricingnegotiations, and rating and underwriting criteria, respectively. Thisdata allows credit rating agencies and insurers, if any, to evaluate theunderlying credit facilities in the portfolio solely from that data andother information included in the database, thereby eliminating the need(and the related additional manpower, expense and time inefficiencies)for the credit rating agencies or insurers to review the loandocumentation underlying each individual credit facility, to enable thecredit rating agencies to “shadow rate” the credit facilities in theportfolio solely from the information contained in the database. Usingthis data, anticipated cash flows for the credit facilities in theportfolio are determined and aggregated, and a pricing mechanism isdetermined, as represented by step 104 in FIG. 1, and a securitizationmodel or capital structure is developed in step 106. A detaileddescription of the aggregation process and the development of asecuritization model is discussed below in connection with theillustrative example in FIGS. 18-39.

Various database or template models are suitable for use with thepresent invention, depending on various factors including the particularcredit rating agency involved in the transaction. These database modelsmay be implemented by way of various commonly available softwareplatforms, such as Microsoft Office 2000.

Selection of Distressed Commercial Credit Facilities

FIGS. 2A-2D illustrate in greater detail the process of initialselection of distressed commercial credit facilities for securitizationof a portfolio having at least 30% distressed commercial creditfacilities by selecting the distressed commercial credit facilities inaccordance with predetermined criteria as set forth below in accordancewith the present invention (step 100, FIG. 1). More particularly, theprocess begins with a review of a lender's aggregate portfolio ofdistressed commercial credit facilities at step 108. In particular,initially a tentative portfolio of distressed commercial creditfacilities is selected by the lender in accordance with predeterminedperformance criteria (performing-1, performing-2, and impaired), asdiscussed below, and preliminary percentage allocations provided by thecollateral manager to the lender at step 109. As used herein, (i)“performing-1” means a credit facility (A) in which the borrower iscurrently paying, and is anticipated to continue to pay current intereston amounts owed under the credit facility throughout the term of thecredit facility, and (B) which is anticipated to have a par or near par(i.e., at least 85% of face value) recovery of principal and accruedinterest at maturity, (ii) “performing-2” means a credit facility (A) inwhich the borrower is paying current interest on amounts owed under thecredit facility, but is anticipated as not likely to continue to paycurrent interest throughout the term of the credit facility, and (B)which is anticipated to have a less than near par (i.e., in the range of60-85% of face value) recovery of principal and accrued interest atmaturity, and (iii) “impaired” means a credit facility in which theborrower is in default on an obligation to pay current interest.

The preliminary percentages of performing-1, performing-2 and impairedcredit facilities are determined by the collateral manager on acase-by-case basis, but, for purposes of illustration only, may beassumed to be in the ranges of 35-40%, 40-45%, and 15-25%, respectively,of the aggregate principal balance of the portfolio. These percentagesare adjusted by the collateral manager in accordance with normalbusiness practices (taking into account the timing and amount ofestimated borrower payments and recoveries on collateral) to balance thedistressed commercial credit facility portfolio in connection with theproposed securitization in order to create a synthetic cash flow streamthat emulates the characteristics of a pool of dissimilar size ofperforming credit facilities (e.g., there may be need for a largernumber of distressed credit facilities in the pool than would otherwisebe required if the pool consisted of performing credit facilities, inorder to mirror the performance characteristics of a performing loanpool). For example, the greater the percentage of performing-1 creditfacilities in the pool, the greater the corresponding percentage ofimpaired credit facilities that may be included.

The initial credit facilities selected by the lender are furtherscreened in steps 110, 112, 114, 116 and 118 in the illustrativeexample. These steps 110-118 are intended to further refine theselection of the distressed credit facilities included in the initial,tentative portfolio in a manner that ultimately will result in aportfolio that emulates the results of studies by credit ratingagencies' such as S&P, Moody's, and Fitch, regarding anticipated cashflow characteristics and recoveries on senior secured commercial debtinstruments. More particularly, the methodology of the present inventionincludes a system to gather data and price loans, and to model cashflows and loan performance in a manner satisfactory to the credit ratingagencies and which meets their requirements to quantify risk within thecontext of various existing default studies (e.g., Carty, Lea V. et al.,“Bankrupt Loan Recoveries,” A Moody's Special Comment, Moody's, June1998; Carty, Lea V. and Hamilton, David T., “Debt Recoveries forCorporate Bankruptcies,” A Moody's Special Comment, Moody's, June 1999;Van de Castle, Karen and Keisman, David, “Recovering Your Money:Insights Into Losses From Defaults,” S&P CreditWeek, Jun. 16, 1999;Hamilton, David T., “The Investment Performance of Bankrupt CorporateDebt Obligations: Moody's Bankrupt Bond Index 2000,” A Moody's SpecialComment, Moody's, February 2000; Brand, Les and Bahar, Reza, “Recoverieson Defaulted Bonds Tied to Seniority Rankings,” A S&P Special Report:Ratings Performance 1999, February 2000; Keisman, David and Yung, Ruth,“Suddenly Structure Mattered Insights into Recoveries of DefaultedDebt,” S&P CreditWeek, May 31, 2000).

The process is applied to each credit facility initially selected by thelender, and is designed to exclude credit facilities which, according topublished credit rating agency studies, have poor historical principalrecovery profiles and erratic cash flow characteristics, and whoseinclusion would negatively affect the rating agencies' assessment ofrisk for the SPE. The process is based upon some or all of the exemplarycriteria in accordance with the present invention, illustrated anddescribed in connection with FIGS. 2A-2D. It should be noted that thecriteria may vary as credit rating agencies update their studies ordifferent credit rating agencies are chosen for the transaction.

More specifically, in the illustrative example, credit facilities in thelender's initial, tentative portfolio which, by the terms of their loandocumentation, mature too late in the term of the proposedsecuritization are eliminated in step 110. This step serves to reducethe risk that the collateral manager will be left with insufficient timeto recover on credit facilities on which the corresponding borrowerdefaults on one or more payments before those payments are renewed andneeded by the collateral manager to fund and pay the securities issuedby the SPE at their stated or credit-rated maturity. Next in step 112 inthe illustrative example, unsecured credit facilities and creditfacilities secured only by stock or other equity interests in thecorresponding borrower's subsidiaries are eliminated. Moreover, in theillustrative example, credit facilities that are denominated in foreigncurrency and credit facilities extended to non-U.S. borrowers aresubsequently eliminated in step 114, and credit facilities extended toborrowers whose debt is supported by no or minimal collateral and/orminimal restrictive covenants (sometimes referred to in lending parlanceas “fallen angel borrowers” after their debt has become distressed) areeliminated in step 116. Subsequently in step 118, credit facilitiesextended to borrowers that are tainted by material accountingirregularities, significant environmental problems, protractedlitigation, and the like are eliminated. After eliminating creditfacilities from the initial, tentative portfolio 109 in steps 110, 112,114, 116, and 118, a tentative portfolio 120 containing creditfacilities eligible for securitization according to the presentinvention is assembled.

Referring to FIG. 2B in the illustrative example, the tentativeportfolio 120 is used as a starting point for the “current” creditfacility portfolio, as indicated in step 122, and further analyzed andmanipulated as discussed below in connection with the illustrativeexample in FIGS. 2B-2D to ensure that credit facilities in the tentativeportfolio 120 meet various diversification requirements. In particular,these procedures are intended to test if the tentative portfolio 120meets, for example, S&P industry sector concentration limits and whetherthe tentative portfolio 120 is likely to have, for example, a Moody'sdiversity score of at least 25. More particularly, in step 124, adetermination is made of the borrower diversity and specifically whetherthe number of borrowers represented in the current credit facilityportfolio 122 is greater than 30. If not, the current portfolio 122 isnot likely to meet the criteria for diversity and, consequently, theproposed securitization of the current portfolio 122 is not performedunless the current portfolio 122 can be modified. More particularly, ifit is determined that the number of borrowers represented in the currentcredit facility portfolio is not greater than 30, then a determinationis made in step 126 whether the lender has other eligible creditfacilities which can be included in the current portfolio 122 toincrease the number of borrowers represented therein above 30. If thereare other eligible credit facilities, then these other eligible creditfacilities are added to the current portfolio in step 128 to meet theborrower diversity requirement.

Once the borrower diversity requirement is met for either the currentportfolio 122 or the modified current portfolio, the portfolio isfurther processed in steps 130, 132, and 134 in the illustrative exampleto determine loan commitment concentration for each borrower representedin the portfolio. More particularly, the percentage of the loancommitments to each borrower relative to the aggregate loan commitmentsto all borrowers under all credit facilities included in the currentportfolio 122 or modified current portfolio is determined in step 130.Subsequently, a determination is made in step 132 whether the loancommitments to any borrower represent more than 5% of the aggregate loancommitments to all borrowers under all credit facilities included in theportfolio, with the norm being in the range of, for example, 1.5-3%. Ifso, the current credit portfolio 122 or modified current portfolio isagain rebalanced so that the loan commitments for any borrower representno more than 5% of the aggregate loan commitments included in theportfolio.

After the loan commitment concentration is determined for each borrower,the industry diversification of the portfolio is determined asillustrated in FIG. 2C. More particularly, an industry code identifyingthe industry occupied by the business or operations for each borrower isdetermined in step 136 from a list 138 of industry groups andcorresponding classification codes, such as provided by S&P. After theindustry codes have been identified for each borrower in the portfolio,the number of industries represented in the current portfolio is countedin step 140 to determine whether at least 12 different industries arerepresented in the current portfolio, at step 142. If not, othereligible credit facilities in other industries (step 144) are added tothe portfolio in step 146, if possible, to meet the industrydiversification criteria, subject to the 5% borrower loan commitmentconcentration criteria described above. If that is not possible, adetermination is made that the portfolio is not likely to meet creditrating agency industry diversification criteria.

Once the industry diversification criteria are satisfied, the loancommitment concentration for each industry is determined in step 148 toascertain whether the current portfolio meets loan commitmentconcentration criteria as illustrated in FIG. 2D. More particularly, thesteps, illustrated in FIG. 2D, test whether the current portfolio meetsS&P industry concentration limits. The database model may also be usedto test whether the portfolio is likely to have a Moody's diversityscore of at least 25 using Moody's published diversity score model whichis also dependent on industry diversification. Initially in step 150 inthe illustrative example, the current portfolio is evaluated todetermine if the loan commitment concentration is less than 5% for atleast four industries. If not, the current portfolio is rebalanced instep 152, subject to the criteria discussed above to attempt to satisfythis industry concentration requirement. If so, the portfolio is furtherevaluated in step 154 to determine whether the loan commitmentconcentration is at least 5%, but less than 8% in at most fiveindustries. If this criteria is not met, the portfolio is rebalanced instep 152 as discussed above. If the criteria is met, the portfolio isfurther evaluated to determine whether the loan commitment concentrationis at least 8%, but less than 12% in at most two industries in step 156.If not, the current loan portfolio is rebalanced in step 152 asdiscussed above to meet this criteria. Subsequently in step 158, theloan commitment concentration is evaluated to determine if there are anyconcentrations of at least 12%, but less than 16% in at most oneindustry. If this criteria is not met, then the portfolio may berebalanced as discussed above to attempt to meet the criteria. If thecriteria is met, the industry concentration further is evaluated todetermine whether the loan commitment concentration is less than 16% forall industries represented in the current portfolio in step 160. Onceagain, if this criteria is not met, the portfolio is rebalanced in step152, as discussed above. The borrower and industry concentration anddiversity standards discussed above are merely exemplary and may beadjusted to reflect current credit rating agency standards andsubsequent modifications.

Due Diligence

The system in accordance with the present invention may include acomprehensive protocol including: conducting on-site due diligence ofeach credit facility in a lender's distressed credit facility portfolio;performing a discounted cash flow valuation for each credit facility inthe distressed credit facility portfolio; maintaining a current databaseto include the financial and restructuring progress of each borrower inthe distressed credit facility portfolio; developing a capital structurefor the SPE based on the information discovered during the due diligenceand database creation process; determining collateral value estimatesfor each borrower; developing a workout strategy for handling workout ofa borrower's distressed loans; and analyzing the performance of eachasset in the SPE's portfolio. Various models may be utilized dependingon the particular credit rating agency or agencies involved in thetransaction. It is preferable to process financial data using computerprogramming, due to the many variables involved. This information may beorganized by way of various commonly available software platforms, suchas Microsoft Office 2000.

As part of the due diligence review, computerized database models ortemplates, as described below, may be used as a guide to facilitate thequantitative, qualitative and legal evaluation in order to (i) assurethe credit rating agencies that full, accurate disclosure has been made,and (ii) efficiently provide the credit rating agencies with concise,but sufficient information regarding each borrower, its financialstatements and the borrower's loans to be included in the portfolio(and, perhaps, other debt facilities of the borrower), general pricingparameters for the loans to be included in the portfolio, and othervaluation criteria and/or analyses to facilitate the agencies'independent examinations of recovery values (rather than the agenciesrequiring their own direct examination of the underlying due diligenceinformation and documentation). Each database model may include numerousfields for data, such as borrower financial statement data, principalamounts, interest rates, credit metrics, amortization tables, industryinformation and cash flow projections.

Overview of Loan Documentation

After the credit facilities are selected for the portfolio and adetermination is made that the portfolio meets the borrower and industrydiversification and loan commitment concentration criteria as discussedabove, the collateral manager processes the documentation as discussedabove in connection with step 102 (FIG. 1) and performs a due diligencereview of the lender's credit facility documentation 172 (FIG. 3) andassembles the required information, as will be discussed in more detailbelow, in a database or template to facilitate review, as discussedabove. The database model may include borrower data 176, creditfacility/debt descriptions 178, financial statement data 180, andgeneral pricing parameters 182 for each credit facility in theportfolio, as described in detail below in connection with theillustrative example in FIGS. 6-10J.

The general pricing parameters 182 may be determined by the collateralmanager, based on the collateral manager's preliminary assessment of aqualitative path of restructuring in order to quantify anticipated cashflow streams and anticipated recoveries, e.g., estimate the number ofmonths of anticipated current interest payments, estimate the percentageof principal recovery at the end of that number of months, and discountthe result by 25% or another commercially reasonable discountpercentage, as described below in connection with the illustrativeexample in FIGS. 6-11.

As described in more detail below, all of this data is then used tocalculate valuation criteria in step 174 for valuing each creditfacility in the distressed commercial credit facility portfolio. Ofcourse, any suitable spreadsheet or accounting, financial, or databasesoftware (e.g., Microsoft Excel, Microsoft Access, etc.) may be used tofacilitate the input of the data and to perform these calculations moresimply or even automatically, as will be readily appreciated by those ofordinary skill in the art.

In order to calculate the loan valuation for each credit facility in theportfolio, various decision variables may be determined by thecollateral manager. These decision variables are described in moredetail below. These decision variables may include collateral valueestimates 186 for each borrower, a work-out strategy 188 for handlingwork-out of the borrower's distressed credit facility and work-outparameters 190. In each case, these decision variables are determined inthe judgment of the collateral manager based on parameters, such as (i)a sale of the borrower entity as a whole, (ii) an orderly sale or salesof the borrower's assets, (iii) a liquidation of the borrower's assets,(iv) the loans performing to maturity, and/or (v) refinancing all or aportion of the outstanding loans at a discount. This process is repeatedfor each credit facility in the portfolio.

A valuation is then calculated for each credit facility in step 192, asdescribed in more detail below in connection with the illustrativeexample in FIGS. 16A-16C. Thereafter, due diligence reports 194 and anynecessary or appropriate ad hoc reports 196 relating to any borrower orany credit facility may be generated for review and analysis by thecollateral manager, lender, credit rating agencies and any insurers inconnection with the contemplated securitization. In addition, anaggregation is performed in step 198 (FIG. 3) using the loan valuations,determined in step 192, in order to develop a capital structure 200 forthe SPE, and a securitization model 202. As will be discussed in moredetail below, a securitization model may be used to ensure that theSPE's capital structure, reserve accounts and cash distributionwaterfalls, in conjunction with the selection of the underlyingcollateral of the distressed credit facilities, are configured toemulate the cash flow and recovery characteristics of a securitizationof performing credit facilities in order to attain an investment graderating or ratings for all of the various tranches of debt instrumentsincluded in the capital structure above any equity or equity-likesecurities.

Exemplary Loan Documentation

FIGS. 4 and 5 illustrate exemplary due diligence loan documentationmaterials 204 obtained by the collateral manager from the lender foreach credit facility in the portfolio in connection with securitizationaccording to the present invention. By way of example and notlimitation, this due diligence loan documentation may include for eachloan: (1) descriptive material 204, such as an original syndicationbook, loan approval memoranda, any relevant presentations to the lender,other financial institutions and/or advisors; (2)(a) for publicly tradedborrowers, various financial information 205 including all filings,notices and reports of the borrower under U.S. federal securities laws(e.g., Forms 10-K, 10-Q, 8-K, etc.) during the borrower's three fiscalyears (or such shorter period as the borrower has been publicly traded)preceding the proposed securitization, for the immediately preceding (orlast) 12 months (the Loan To Month (“LTM”)), and for the most recentyear-to-date interim period; and (b) for borrowers that are not publiclytraded, financial information, such as audited financial statements forthe three fiscal years preceding the proposed securitization (or suchshorter period as the borrower has been in existence), for the LTM, andfor the most recent year-to-date interim period; and (3) various legaldocuments 206, including the original loan documents, and allamendments, restatements, waivers, and forbearance agreements relatingto the credit facility.

FIG. 5 illustrates exemplary additional due diligence loan documentation207-210, which may include, without limitation, compliance certificates207 (including, without limitation, borrowing base calculations andcovenant compliance calculations); independent appraisal reports step208 regarding the borrower and/or the borrower's assets; variousadditional information 209 (for example, the composition of the loansyndicate for a particular credit facility (sometimes referred to hereinas a “bank group”); the aggregate amount of loan commitments for allmembers of the applicable bank group including both funded and undrawnamounts (collectively, the “Global Commitment”); current creditmemoranda including discussions of the borrower and any problems theborrower may have, as well as the bank group and its relatedobligations); and a correspondence file 210 including, withoutlimitation, at least six months of correspondence among, for example,the bank group, the lender's advisors, and the borrower's advisors.

The collateral manager uses the above mentioned information to assessthe status of any restructuring negotiations, including potential debtforgiveness, anticipated changes in legal documentation of the creditfacility, and upcoming asset sales in order to price the credit facilityproperly. The information discussed above is intended to provide thecollateral manager with a snapshot of what transpired historically, andalso to enable the collateral manager to anticipate likely future eventsand the potential effects on cash flow and recovery for a particularborrower.

Database Model—Borrower Data

FIG. 6 illustrates an exemplary database model for organizing theborrower data 176 (FIG. 3). More particularly, the database model ortemplate may be developed with various fields, as discussed below, toorganize the various credit facility documentation 172 (FIG. 3). Asnoted above, suitable software applications, such as commonly availableaccounting or financial databases and/or spreadsheets, may be used toset up the various fields in the database. By way of example and notlimitation, such a database model for borrower data 176 for a givencredit facility may include: a field 211 (FIG. 6) for the name(s) of theborrower; and a field 212 for a unique borrower identification numberthat may be assigned by the collateral manager simply for referencepurposes. Another field 214 may be provided for an identification of themarket, if any, where any equity securities of the borrower are publiclytraded. This field 214 optionally may be implemented with a conventionalWindows scroll-bar in a spreadsheet, allowing for user-selection fromamong a list of available markets. A field 215 may also be provided withthe applicable stock symbol or symbols for each borrower that ispublicly traded. A field 216 may also be included to provide anindication of whether the borrower has any publicly traded debtsecurities. The database model may further include a field 217 for theMoody's industry code associated with the borrower's business and afield 218 for the S&P industry code. A field 220 may be provided toinclude a description of the borrower's business operations and a field222 for a description of the borrower's business model. The databasemodel may also include a field 224 for a statement of the geographicalscope of the borrower's business and a field 226 for a discussion of thecauses of the borrower's financial weakness or distress in the view ofthe collateral manager. A field 228 may also be provided to include adiscussion of the factors driving performance of the borrower,including, for example, involvement of a financial advisor. A field 230may be used for an identification of the loan documents governing thecredit facility, an identification of all financial institutionscomprising the syndicate or bank group and their correspondingparticipation percentages, and an indication of the vote(s) required toamend or waive various provisions of the loan documents. A field 232 mayalso be provided to include an explanation of the risk factors and/orexposures applicable to the borrower or the borrower's industry in theview of the collateral manager. A field 234 may be provided to includean identification of any equity sponsorship of the borrower and sourcesof subordinated debt financing and, finally, a field 236 representingany additional information may be included in the database model foreach credit facility.

Database Model—Loan Information

Each credit facility in the distressed credit facility portfolio mayinclude one or more loans or facilities of various types, including,without limitation, term loans, revolving loans (sometimes referred toas “revolvers”), letter of credit facilities, acquisition financingfacilities, and capital expenditure facilities. The borrower may alsohave other debt facilities not included as part of credit facilitiesdescribed above, such as public debt financing or a separate receivablesfacility. Information regarding such credit and debt facilities may beincluded in a database model along with the borrower informationdiscussed above. More specifically, as shown in FIG. 7A in theillustrative example, the database model for loan information may beconfigured with various fields to organize the loan information (step178, FIG. 3). For example, the loan database model may include for eachloan in a credit facility: a field 238 for the name of the loan and anidentification number for the loan (assigned by the collateral manager);a field 240 for the name of the obligor(s) on the loan; a field 242 foran indication of the currency (or currencies) in which the loan isdenominated (i.e. U.S. dollars); a field 244 for an indication of thepriority of the loan to the borrower and for an indication of thesecured or unsecured status of the loan (e.g., debtor-in-possession(“DIP”) loan, senior secured, senior unsecured, subordinated secured, orsubordinated unsecured); a field 246 for an identification of whetherthe loan is a term loan or a revolver or some other type of facility; afield 248 for the original date of the loan; a field 250 for anindication of the placement of the loan (e.g., broadly syndicated,middle market, or commercial); a field 252 for a Boolean (i.e.,yes-or-no) indication of whether the loan facility is small (i.e.,defined as less than $50,000,000). The loan database model may furtherinclude a field 254 for an identification of the current loan or creditagreement and/or amendment(s) thereto governing the loan (determined instep 230, FIG. 6); a field 256 for the date of the latest amendmentaffecting the loan; a field 258 for an identification of the number ofthe latest forbearance made by the lender in connection with the loan;and a field 260 for an indication of the date of that forbearance; and afield 262 for the expiration date of the latest forbearance.

Referring to FIG. 7B in the illustrative example, the loan databasemodel may further include a field 264 for the dollar amount of theoriginal Global Commitment; a field 266 for an identification of anyguarantor(s) on the loan; a field 268 for an indication of the degree ofsupport that the borrower may be expected to receive from theguarantor(s) if necessary (e.g., do the guarantors have the ability topay the loan if the guarantee is called, or are the guarantors entitieswho themselves have high quality credit ratings); a field 270 for adescription of the collateral securing the loan (e.g., all assets,specific asset(s), unsecured); a field 272 for a description of thebankruptcy status of the borrower (e.g., Chapter 11, Chapter 7, none); afield 274 for the bankruptcy filing date, if applicable; and a field 275for the bankruptcy court with jurisdiction over the bankruptcyproceedings, if applicable.

The loan database model may also include a field 276 for an indicationof whether the borrower is in compliance with its loan covenants (e.g.,yes; no; there is a forbearance in effect regarding covenant violations;or covenants have been waived); a field 278 for an indication of whatpercentage of vote is required for approval of a forbearance regarding,or a waiver of, loan covenants for the borrower and for an indication ofwhat percentage of vote is required for approval of an amendment of theloan covenants. The database model may further include a field 280 foran indication of whether a fixed interest rate is applicable to theloan. If so, fields 282 and 284 may be provided for the applicable cashinterest rate and the applicable payment-in-kind (“PIK”) rate,respectively. In the event that a fixed interest rate is not applicableto the loan, a pair of fields 286 and 288 may be provided in thetemplate for the loan for the margin from the applicable index, such asLIBOR or a prime rate, as the case may be. A field 290 may be providedfor the interest rate applicable to the loan if the borrower defaults onany of its covenants during the term of the loan. It also allows thecollateral manager to change between indices upon exercise of interestrate options by the borrower or the lender.

Turning to FIG. 7C in the illustrative example, the loan database modelmay further include: a field 292 for the fee rate (expressed as apercentage of the unfunded revolver commitment amount) that the lendercharges the borrower for any unfunded revolving loan commitment; a field294 for the fee rate that the lender charges the borrower for a letterof credit; and a field 296 for an indication of the borrower's interestpayment status (e.g., current, in payment default, or deferred). In theevent that the borrower has defaulted on an interest payment orpayments, a field 298 may be provided for specifying the date(s) of thedefault(s). The loan database model may further include a field 299 forspecifying the interest rate option applicable to the loan (e.g.,LIBOR-based, prime-based, the lesser of the two, or fixed); a field 300to calculate the current contractual rate for the loan as the sum of thecash interest rate and PIK rate (if any); and a field 301 for anindication of the current cash payment rate. The loan database model mayalso include information about the terms of the loan relating torepayment of principal, such as a field 302, for an indication of theoriginal final maturity date of the loan; a field 304 for any amendedfinal maturity date of the loan (without regard to any subsequentdefault or acceleration); a field 306 for an indication of theborrower's principal payment status (e.g., current, in default, ordeferred); and a field 307 for the date or dates of any default(s) onany required principal payments. The loan database model may furtherinclude a field 308 for specifying the date on which loan balances wereobtained; a field 310 for the dollar amount of the aggregate commitmentof all members of a bank group to the borrower (the “GlobalCommitment”); a field 311 for the dollar amount of aggregate outstandingprincipal that has been funded by all members of the bank group,including the lender (the “Global Funded Principal”); a field 312 forthe percentage of the Global Commitment held by the lender; a field 313for the percentage of the Global Commitment that the lender has offeredto sell in connection with the proposed securitization; a field 314which calculates the dollar amount of the percentage of the GlobalCommitment held by the lender as the product of fields 310 and 312 andstores the result as the “Lender's Commitment”; a field 315 whichcalculates the dollar amount of the percentage of the Global FundedPrincipal held by the lender as the product of fields 311 and 312 andstores the result as the “Lender's Funded Principal”; a field 316 whichcalculates the dollar amount of the percentage of the Lender'sCommitment offered for sale as the product of fields 314 and 313; and afield 317 which calculates the dollar amount of the percentage of theLender's Funded Principal offered for sale as the product of fields 315and 313 and stores the result as the “Funded Principal Offered”; and afield 318 for any comments or other miscellaneous information that thecollateral manager considers appropriate to clarify other informationincluded in the loan template.

Turning to FIG. 8 in the illustrative example, the loan database modelmay further include various fields regarding the contractualamortization of each loan (step 178, FIG. 3). For example, a field 320may be provided for a schedule of the contractual amortization for eachloan. Additional fields 322, 324, 326, and 328 may be provided forvarious other information regarding the amortization schedule.Specifically, the loan database model may include: a field 322 for theamortization start date; a field 324 for the amount of each globalscheduled principal payment in the amortization schedule; a field 326for an indication of the amortization frequency (e.g., monthly,quarterly, semi-annually, or annually); and a field 328 for the numberof installments or payments in the scheduled amortization. Theinformation regarding the loan contractual amortizations is repeated foreach loan and entered into the fields 320, 322, 324, 326, and 328.

Turning to FIG. 9 in the illustrative example, the loan database modelmay include various fields regarding the bank group (which could be oneor more financial institutions) for each loan (step 178, FIG. 3). Moreparticularly, for each loan, the loan database model may include a field331 for a specification of the bank group or list of financialinstitutions participating in each loan; a field 332 for an indicationof the first member of the bank group which serves as first agent orco-agent for the credit facility (the “First Agent Bank”); a field 333for an indication of another or second member of the bank group whichserves as agent or co-agent for the credit facility (the “Second AgentBank”); and a field 334 for the “as of” date of any due diligenceinformation provided regarding the bank group.

The loan database model may also include fields 336, 338, and 340 foreach financial institution in the bank group. In particular, for eachfinancial institution in the bank group the following fields may beprovided: a field 336 for the name of that institution; a field 338 forthe dollar amount of the commitment made to the borrower by thatinstitution in connection with the loan; and a field 340 for thepercentage of the Global Commitment extended by that financialinstitution. Either or both of the fields 338 and 340 may be used as ameasure of the relative contributions of each member of the bank groupto the Global Commitment (i.e., each institution's commitment may beexpressed as a dollar amount or as a percentage). The financialinstitution data for each financial institution in a bank group isrepeated and entered into fields 332, 333, 334, 336, 338, and 340.

Database Model—Borrower Financial Information

The financial statement data for each borrower in the credit facilityportfolio, represented by the step 180 of FIG. 3, is described in moredetail below. The borrower financial data for each credit facility maybe obtained from financial statements (e.g., income statement, balancesheet and statement of cash flows) of the corresponding borrower, aswell as financial statements for the LTM, the most recent year-to-dateinterim period, and a corresponding interim period in the immediatelypreceding fiscal year, sometimes referred to as “same-period-last-year”(“SPLY”) and entered into a borrower financial information databasemodel described below. Turning to FIG. 10A, in particular, this databasemodel may include a field 344 for storing a period name for the timeperiod represented by a particular financial statement (e.g., fiscalyear 2000, last 12 months, year-to-date). The database model may alsoinclude a field 346 for the length of that period (e.g., 12 months,eight months); a field 348 for the beginning date of the financialperiod covered by the financial statement; and a field 350 for the enddate of the financial period.

The database model may also include various fields for organizing incomestatement information of the borrower for each of the fiscal periods,identified in fields 344, 346, 348 and 350. In this regard, the databasemodel may include a field 352 for the borrower's net sales/revenues forthe period; a field 354 for the borrower's cost of goods sold/cost ofsales for the period; a field 355 which calculates the gross profit(loss) for the period by subtracting from net sales/revenues (field352), the cost of goods sold/cost of sales (field 354); a field 356 forother operating income of the borrower for the period; a field 358 forthe selling, general and administrative (SG&A) expenses of the borrowerfor the period; a field 359 for depreciation and amortization expenseincluded in SG&A; a field 360 for management fees incurred by theborrower for the period; a field 361 for restructuring charges incurredby the borrower for the period; and a field 362 for asset impairmentcharges incurred by the borrower for the period.

The database model may further include a field 363 for storing acalculation of the borrower's total operating expenses for the period asthe sum of fields 358, 360, 361 and 362; and a field 364 which stores acalculation of borrower's operating income (sometimes referred to as“earnings before interest and taxes” or “EBIT”) for the period bysubtracting from the borrower's gross profit (loss) (step 355) the totaloperating expenses for the period (step 363).

As shown in FIG. 10B in the illustrative example, the database model mayfurther include for the period, a field 368 for specifying the resultsof unconsolidated subsidiaries and joint ventures of the borrower forthe period and a field 370 for total interest expense. As shown in FIG.10C in the illustrative example, the total interest expense may bedetermined by adding the senior secured portion of the total interestexpense (field 372, FIG. 10B) to the other interest expense (field 374FIG. 10B). The database model may also include: a field 372 (FIG. 10B)for the senior secured interest expense of the borrower for the period;a field 374 for other interest expense; a field 376 for interest incomeof the borrower for the period; and a field 377 for net interest expenseof the Borrower for the period. As shown in FIG. 10C, the net interestexpense may be determined by subtracting interest income (field 376)from total interest expense (field 370). The database model may alsoinclude a field 378 (FIG. 10B) for currency gain or (loss) realized bythe borrower for the period; a field 380 for any gain or (loss) realizedby the borrower on asset sales outside the ordinary course of businessduring the period; a field 382 for any other non-operating income or(loss) of the borrower for the period; and a field 384 for anynon-recurring gain or (loss) of the borrower for the period. Thedatabase model may further include a field 385 which calculates thepre-tax income (loss) of the borrower for the period by adding to orsubtracting from the borrower's operating income for the period (field364, FIG. 10A), as appropriate (depending on whether the value isindicative of an item of income or expense, or gain or loss, as the casemay be), fields 368, 377, 378, 380, 382 and 384, as shown in FIG. 10B.The database model may also include a field 386 for income tax expense(benefit); and a field 387 for minority interest in earnings (loss). Thedatabase model may also include a field 388 which calculates theborrower's net income (loss) from continuing operations beforeextraordinary items for the period by adding to, or subtracting from theborrower's pre-tax income (loss) for the period (field 385), asappropriate (depending on whether the value is indicative of an item ofincome or expense, or gain or loss, as the case may be), fields 386 and387, as shown in FIG. 10B. The database model may further include afield 389 for discontinued operations (net); a field 390 for anyextraordinary gain or (loss) (net of tax) of the borrower for theperiod; and a field 391 which calculates the borrower's net income(loss) before preferred dividends by adding to, or subtracting from, theborrower's net income from continuing operations before extraordinaryitems for the period (field 388), as appropriate (depending on whetherthe value is indicative of an item of gain or loss, as the case may be),fields 389 and 390 as shown in FIG. 10B. The database model may furtherinclude a field 392 for the amount of any preferred dividends payable bythe borrower with respect to such period; and a field 394 whichcalculates the borrower's net income (loss) to common for the period bysubtracting field 392 from the borrower's net income (loss) beforepreferred dividends for the period (field 391). The database model mayalso further include for each credit facility a field 396 forinformation from footnotes to the borrower's financial statements.

With reference to FIG. 10D in the illustrative example, the databasemodel may also include a field 399 for depreciation and amortization notincluded in SG&A expense. As shown in FIG. 10E in the illustrativeexample, a field 400 is used to set EBITDA (the well-known acronym for“earnings before interest, taxes, depreciation, and amortization”)(unadjusted) for the borrower equal to the sum of EBIT (field 364),depreciation and amortization included in SG&A (field 359), anddepreciation and amortization not included in SG&A (field 399). Thedatabase model may also include a field 401 for adjustments to normalizeEBITDA (such as restructuring charges, non-recurring or one-time eventsand noncash charges). A field 402 computes EBITDA (adjusted) as the sumof EBITDA (unadjusted) from field 400 and adjustments (field 401), asshown in FIG. 10D.

The database model may include a field 404 (FIG. 10D) for maintenancecapital expenditures (“CAPEX”); a field 406 for acquisition CAPEX; and afield 407 which computes EBITDA-CAPEX (sometimes referred to as “freecash flow”) as the difference of EBITDA (adjusted) (field 402) and CAPEX(the sum of fields 404 and 406). A field 410 may be provided to computethe gross margin by dividing gross profit (loss) (field 355, FIG. 10A)by net sales/revenues (field 352). A field 412 may be provided tocompute an SG&A margin by dividing SG&A expense (field 358) by netsales/revenues (field 352). A field 414 may be provided to compute anoperating (EBIT) margin by dividing operating income (EBIT) (field 364)by net sales/revenues (field 352). A field 415 computes a pre-tax marginby dividing pre-tax income (loss) (field 385) by net sales/revenues(field 352). A field 416 then computes an EBITDA (unadjusted) margin bydividing EBITDA (unadjusted) (field 400) by net sales/revenues (field352), and a field 418 computes an EBITDA (adjusted) margin by dividingEBITDA (adjusted) (field 402) by net sales/revenues (field 352).

As shown in FIG. 10F in the illustrative example, various interestcoverage ratios are then calculated for the borrower. In particular, thesenior interest expense is set equal to the value in field 372 (FIG.10B) and stored in a field 419. The ratio of EBIT to senior interestexpense is calculated by dividing EBIT (field 364) by the seniorinterest expense (field 419) and stored in a field 420. The ratio ofEBITDA to senior interest expense is calculated by dividing EBITDA(adjusted) (field 402) by senior interest expense (field 419) and storedin a field 422; and, the ratio of EBITDA-CAPEX to senior interestexpense is calculated by dividing EBITDA-CAPEX (field 407) by seniorinterest expense (field 419) and stored in a field 424. The totalinterest expense is set equal to the value in field 370 and stored in afield 426. The ratio of EBIT to total interest expense is calculated bydividing EBIT (field 364) by total interest expense (field 426) andstored in a field 428; the ratio of EBITDA to total interest expense iscalculated by dividing EBITDA (adjusted) (field 402) by total interestexpense (field 426) and stored in a field 430; and, the ratio ofEBITDA-CAPEX to total interest expense is calculated by dividingEBITDA-CAPEX (field 407) by total interest expense (field 426) andstored in a field 432. The net interest expense is set equal to thevalue in field 377 (FIG. 10D) and stored in field 434. The ratio of EBITto net interest expense is calculated by dividing EBIT (field 364) bynet interest expense (field 434) and stored in a field 436; the ratio ofEBITDA to net interest expense is calculated by dividing EBITDA(adjusted) (field 402) by net interest expense (field 434) and stored infield 438; and, the ratio of EBITDA-CAPEX to net interest expense iscalculated by dividing EBITDA-CAPEX (field 407) by net interest expense(field 434) and stored in field 439.

With reference to FIG. 10G in the illustrative example, the databasemodel for the credit facility also may include a field 440 for anidentification of the auditor that audited the financial statements ofthe borrower and a field 441 for specifying the period covered by thefinancial statements. The database model may also include a field 442for the borrower's changes in working capital from the priorcorresponding period; and a field 443 for cash taxes for the period.

In addition, the database model for each credit facility may include thefollowing balance sheet data for the borrower as of the last day of theapplicable fiscal period (FIG. 10G): a field 444 for cash and cashequivalents; a field 446 for trade accounts receivable; a field 448 forthe accounts receivable of any related parties to the borrower (e.g.,parent company, joint venture partner); and a field 450 for inventory; afield 452 for other current assets (unrelated); and a field 454 forother current assets (related). A field 456 is used to store acomputation of total current assets as the sum of cash and cashequivalents (field 444), accounts receivable and related accountsreceivable (fields 446 and 448), inventory (field 450), other currentassets and related party current assets (fields 452 and 454), as shownin FIG. 10I.

The database model may also include the following balance sheet data forthe borrower as of the last day of the applicable fiscal period: a field458 for an indication of any investment by the borrower in subsidiarieswhich are reported under the equity method of accounting; a field 460(FIG. 10H) for specifying property, plant, and equipment (PP&E); a field462 for accumulated depreciation; a field 464 for goodwill; a field 466for other non-current assets (related); and a field 468 for othernon-current assets (unrelated). A field 470 may be used to store acomputation of intangibles and other non-current assets (“NCA”) as thesum of goodwill (field 464), other non-current assets (related) (field466) and other non-current assets (unrelated) (field 468), as shown inFIG. 10I. In the illustrative example, the total assets is computed asthe sum of total current assets (field 456), investment in equity methodsubsidiaries (field 458), net PP&E (field 460 minus field 462), andintangibles and other non-current assets (field 470) and stored in afield 472.

Referring back to FIG. 10H, the database model may also include a field474 for senior secured short-term debt; a field 476 for currentmaturities of senior secured long-term debt; a field 478 for othershort-term debt; a field 480 for other current maturities of long-termdebt; a field 482 for accounts payable; and a field 484 for othercurrent liabilities. As shown in FIG. 10I, a field 486 may be used tostore the computation of the total current liabilities as the sum ofsenior secured short-term debt (field 474), current maturities of seniorsecured long-term debt (field 476), other short-term debt (field 478),other current maturities of long-term debt (field 480), accounts payable(field 482), and other current liabilities (field 484). Referring backto FIG. 10H, the database model also may include a field 488 for seniorsecured long-term debt; a field 490 for other long-term debt; a field492 for deferred income taxes; and a field 494 for other non-currentliabilities. As shown in FIG. 10J in the illustrative example, a field496 may be used to store the computed total liabilities as the sum oftotal current liabilities (field 486), senior secured long-term debt(field 488), other long-term debt (field 490), deferred income taxes(field 492), and other non-current liabilities (field 494). Referringback to FIG. 10H, the database model may also include a field 498 forpreferred equity; a field 500 for common equity; and a field 502 forretained earnings (deficit).

In the illustrative example, a field 504 may be used to store thecomputed total equity as the sum of preferred equity (field 498), commonequity (field 500) and retained earnings (field 502). A field 506 may beused to store a computation of total liabilities and shareholders'equity as the sum of total liabilities (field 496) and total equity(field 504). A field 508 may be used to store the computation of thetotal senior secured debt as the sum of senior secured short-term debt(field 474), senior secured current maturities of long-term debt (field476), and senior secured long-term debt (field 488). A field 510 may beused to store the computation of the total debt as the sum of totalsenior secured debt (field 508), other short-term debt (field 478),other current maturities of long-term debt (field 480), and otherlong-term debt (field 490). A field 512 may be set equal to cash andcash equivalents (field 444). A field 514 may be used to store thecalculated net debt determined by subtracting cash (field 512) fromtotal debt (field 510). The book equity may be calculated as the sum ofpreferred equity (field 498), common equity (field 500) and retainedearnings (deficit) (field 502) and stored in a field 516. A field 518may be used to store the computation of the total capital (orcapitalization), determined as the sum of cash (field 512), net debt(field 514) and book equity (field 516). A field 520 may be used tostore a computation of net capital (or capitalization) by subtractingcash (field 512) from total capital (field 518). The ratio of seniordebt/capitalization may be calculated by dividing total senior debt(field 508) by total capital (field 518) and stored in a field 522. Theratio of total debt/capitalization may be calculated by dividing totaldebt (field 510) by total capital (field 518) and stored in a field 524.The ratio of net debt/capitalization may be calculated by dividing netdebt (field 514) by total capital (field 518) and stored in a field 526.A field 528 may be used to store the ratio of senior debt/EBITDA bydividing senior debt (field 508) by EBITDA (field 402). The ratio oftotal debt/EBITDA may be calculated by dividing total debt (field 510)by EBITDA (field 402) and stored in field 530. Finally, field 532 may beused to store the calculation of the ratio of net debt/EBITDA bydividing net debt (field 514) by EBITDA (field 402).

Database Model—General Pricing Parameters

The process for entry of general pricing parameters, mentioned above inconnection with the step 182 of FIG. 3 is described in more detail inconnection with FIG. 11 in the illustrative example. For the entry ofgeneral pricing parameters regarding each credit facility, the databasemodel may include a field 552 for an internal rate of return (“IRR”)assigned by the collateral manager (e.g., a minimum of 25%, based uponexpected payments and recoveries on collateral or such other rate as thecollateral manager may determine based, for example, on prevailingmarket conditions) to be used for evaluation of the loan; a field 554for the pricing date on which the corresponding price for the creditfacility is set; a field 556 for LIBOR on the pricing date; a field 558for the applicable prime lending rate on the pricing date; a field 560for the anticipated closing date of the proposed securitization; a field562 for the estimated LIBOR rate on the anticipated closing date (andfor future payment dates); and a field 564 for the estimated applicableprime lending rate on the anticipated closing date (and for futurepayment dates) (it should be noted that credit rating agencies arelikely to assume increasing interest rates when evaluating the portfolioand the underlying credit facilities).

Determination of Valuation Criteria

The process of determining valuation criteria mentioned above inconnection with the step 174 (FIG. 3) is described below in connectionwith FIGS. 12A-12B in the illustrative example. Initially, it should benoted that this process is described herein as performed for a singlecredit facility, but that, in connection with a proposed securitization,the process of FIGS. 12A-12B is repeated for each credit facility to beincluded in the distressed credit facility portfolio to be used ascollateral for the proposed securitization.

FIG. 12A illustrates the calculation of a current contractual interestrate for each loan included in each credit facility in the selectedportfolio of at least 30% or more distressed commercial creditfacilities. As shown, a determination is made in step 566 whether theinterest rate for a loan is fixed (e.g., based on the content of thefield 299, FIG. 7C). If so, the contractual interest rate for the loanis set equal to the sum of the cash interest rate and the PIK interestrate in step 568. If it is determined in step 566 that the interest ratefor the loan under consideration is not a fixed rate, then adetermination is made in step 574 of the applicable interest rate optionfor the loan. If the loan is based on LIBOR, the contractual interestrate for the loan is set equal to the sum of LIBOR on the pricing datefrom the field 556 (FIG. 11) and the applicable LIBOR margin from thefield 286 (FIG. 7B) in step 576. If is it determined in step 574 thatthe loan is based on a prime lending rate, then the contractual interestrate for the loan is set equal to the sum of the applicable prime rateon the pricing date (field 558, FIG. 11) and the applicable prime margin(field 288, FIG. 7B) in step 578. If it is determined in step 574 thatthe loan is based on the lower of LIBOR and the applicable prime rate,then the rates for steps 576 and 578 are computed and the contractualinterest rate for the loan is set equal to the lesser of those tworates. This process is repeated for all loans in the credit facility,via steps 570 and 572.

The process illustrated in FIG. 12B is used to calculate the cash payrate for each loan in each credit facility in the distressed creditfacility portfolio. Initially in step 582, a determination is madewhether the corresponding borrower is current or in default on interestpayments based on the field 296 (FIG. 7C) for the loan and creditfacility under consideration. If it is determined in step 582 that theborrower is current on interest payments, then the cash pay rate is setequal to the contractual interest rate for the loan obtained in step584, and a determination is made in step 586 whether the cash pay ratehas been determined for the last loan in the credit facility. If it isdetermined in step 582 that the borrower is in default on payinginterest, then the cash pay rate is set equal to zero in step 588, and adetermination is made in step 586 whether the cash pay rate has beendetermined for the last loan in the credit facility. This process isrepeated for all loans in the credit facility, via steps 586 and 590.

Database Model—Collateral Coverage

Upon completion of all of the foregoing calculations of valuationcriteria (step 174, FIG. 3), particularized information needed by acollateral manager to evaluate collateral coverage of the distressedasset portfolio is evaluated as mentioned above in connection with thesteps 184 and 186 (FIG. 3). Such decision information is shown in moredetail in FIG. 13A in the illustrative example. As shown, variousdecision information is obtained in step 592 from: the borrower data(step 176, FIG. 3), loan descriptions (step 178, FIG. 3), financial data(step 180, FIG. 3). Preferably, this decision information includesinformation regarding assets needed for evaluating collateral coverage,including cash and cash equivalents, accounts receivable (unrelated),related accounts receivable, inventory, other current assets(unrelated), total current assets, equity method investments, PP&E,goodwill, related non-current assets, and other (unrelated) non-currentassets. If applicable, the information may also include the date of anyappraisal of any particular asset class included in the due diligencematerials received from the lender. Of course, the information displayedto the collateral manager may be tailored to the particular preferencesof the collateral manager or as appropriate to facilitate theformulation of collateral value estimates, workout strategy, and workoutparameters by the collateral manager in the manner described below.Thereafter, a step 594 sets a collateral valuation percentage of cashequal to 100% of the aggregate amount of cash and cash equivalentsdisplayed in step 444.

The collateral manager may then enter an accounts receivable (unrelated)appraisal date into a field 596 and an accounts receivable (unrelated)valuation percentage (e.g., in the range of 65-85%, as determined by thecollateral manager based on such factors as any recent writtenappraisals included in the loan documentation, or the financialstability and quality of the account debtors (as determined, forexample, from services such as Dun & Bradstreet, or based on historicaldata on collections in the industry)) into a field 598. A field 600 isprovided to store a computation of the collateral valuation of accountsreceivable (unrelated) determined as the product of the accountsreceivable (unrelated) amount from the field 446 (FIG. 10E) and thevaluation percentage from the field 598. A field 602 may also beprovided for any related comments or remarks of the collateral manager.A field 604 is also provided for entry of an accounts receivable(related party) appraisal date (if available).

As shown in FIG. 13B in the illustrative example, a field 606 isprovided for entry of an accounts receivable (related party) valuationpercentage (which often may be in the range of 0-10%, because of therelated party nature of the underlying transactions and generally lowlikelihood of collection), and a field 608 computes a collateralvaluation of related party accounts receivable as the product of therelated party accounts receivable (field 448, FIG. 10E) and the relatedparty accounts receivable valuation percentage from the field 606. Afield 610 may also be provided for any related comments or remarks ofthe collateral manager.

An inventory appraisal date may be entered in a field 612, an inventoryvaluation percentage (e.g., in the range of 30-50%, as determined by thecollateral manager based on such factors as any recent writtenappraisals included in the loan documentation or market informationavailable regarding the type of product and ease of sale) may be enteredinto a field 614, and a field 616 computes a collateral valuation ofinventory as the product of inventory (field 450, FIG. 10E) and theinventory valuation percentage of the field 614. A field 618 may also beprovided for any related comments or remarks of the collateral manager.

An appraisal date for unrelated other current assets may be entered in afield 620 and a valuation percentage (which often may be 0%, unless theunrelated other current assets are comprised of high quality, liquidinvestments) for unrelated other current assets may be entered into afield 622. A field 624 computes a collateral valuation of unrelatedother current assets as the product of unrelated other current assets(field 452, FIG. 10C) and the valuation percentage of the field 622. Afield 626 may also be provided for any related comments or remarks ofthe collateral manager. A field 636 then computes a collateral valuationof total current assets as the sum of the collateral valuations computedby the fields 594, 600, 608, 616, and 624.

As shown in FIG. 13C in the illustrative example, an appraisal date forequity method investments may be entered into a field 638, and avaluation percentage (which generally will be 0%, unless there is arecent written appraisal supporting another percentage in the loandocumentation, or unless there is a currently available stock price froma national U.S. exchange or stock market) for equity method investmentsmay be entered into a field 640. A field 642 is used to store acomputation of the collateral valuation of equity method investments,determined as a product of equity method investments (field 458) and thevaluation percentage of the field 640. A field 644 may also be providedfor any related comments or remarks of the collateral manager. Anappraisal date for PP&E may be entered into a field 646, and a valuationpercentage (e.g., in the range of 20-25%, unless there are recentwritten appraisals supporting different percentages in the loandocumentation) for PP&E may be entered into a field 648. A field 650 maybe used to store a computation of a collateral valuation of PP&E as theproduct of PP&E (field 460, FIG. 10F) and the valuation percentage ofthe field 648. A field 652 may also be provided for any related commentsor remarks of the collateral manager.

An appraisal date for goodwill may be entered into a field 654 and avaluation percentage for goodwill (which generally will be 0%, unlessthere is a recent written appraisal supporting another percentage in theloan documentation) may be entered into a field 656. A collateralvaluation of goodwill is calculated as the product of goodwill (field464) and the valuation percentage of the field 656 and stored in a field658. A field 660 may also be provided for any related comments orremarks of the collateral manager.

As shown in FIG. 13D in the illustrative example, an appraisal date forrelated non-current assets may be entered into a field 662, and avaluation percentage (which generally will be 0%, unless there is arecent written appraisal supporting another percentage in the loandocumentation) for related non-current assets may be entered into afield 664. A field 666 may be used to store a computation of thecollateral valuation of related non-current assets as the product ofrelated non-current assets (field 466) and the valuation percentage ofthe field 664. A field 668 also may be provided for any related commentsor remarks of the collateral manager. An appraisal date for othernon-current assets (unrelated) may be entered into a field 670, and avaluation percentage for other non-current assets (unrelated) (whichgenerally will be 0%, unless there is a recent written appraisalsupporting another percentage in the loan documentation) may be enteredinto a field 672. A collateral valuation of other non-current assets(unrelated) may be computed as the product of other non-current assets(unrelated) (field 468, FIG. 10H) and the valuation percentage of thefield 672 and stored in field 674. A field 676 also may be provided forany related comments or remarks of the collateral manager. A collateralvaluation of total assets (“total collateral value”) may be computed asthe sum of the collateral valuations of the fields 636, 642, 650, 658,666, and 674 and stored in a field 678.

As shown in FIG. 13E in the illustrative example, initially in step 679,the Global Funded Principal may be calculated for each of various“classes” of loans in the distressed credit facility on the basis ofpriority and security attributes of those loans (e.g. DIP, seniorsecured, subordinated secured, senior unsecured, subordinated unsecuredand other) as previously identified in field 244, FIG. 7A. Moreparticularly, total DIP debt may be computed as a sum of Global FundedPrincipal (field 311, FIG. 7C) of all DIP loans included in the creditfacility as illustrated in step 680; total senior secured debt may becomputed as a sum of Global Funded Principal (field 311, FIG. 7C) of allsenior secured loans included in the credit facility and displayed asillustrated in step 681; total subordinated secured debt may be computedas a sum of Global Funded Principal (field 311, FIG. 7C) of allsubordinated secured loans included in the credit facility as indicatedin step 682 total senior unsecured debt may be computed as a sum ofGlobal Funded Principal (field 311, FIG. 7C) of all senior unsecuredloans included in the credit facility as indicated in step 683; totalsubordinated unsecured debt may be computed as a sum of Global FundedPrincipal (field 311, FIG. 7C) of all subordinated unsecured loansincluded in the credit facility as indicated in step 684; and totalother debt may be computed as a sum of Global Funded Principal (field311, FIG. 7C) of all other loans included in the credit facility asindicated in step 685. Similar calculations may be made, displayed andstored for all other outstanding credit facilities of a borrower.

As shown in FIG. 13F in the illustrative example, a determination may bemade of the collateral value for each of the various classes of loans ineach credit facility in the distressed credit facility portfolio byapplying the collateral parameters applicable to that loan type (e.g.,all assets, specific assets, unsecured, field 270, FIG. 7B) to the totalcollateral value (field 678, FIG. 13D), thus determining the collateralvalue of the assets securing that particular loan class as indicated in:field 686 for DIP loans; field 687 for senior secured loans; field 688for subordinated secured loans; field 689 for senior unsecured loans;field 690 for subordinated unsecured loans; and field 691 for otherloans. As shown in FIG. 13G in the illustrative example, the collateralcoverage then may be determined for each loan class in each creditfacility by dividing the collateral value of the assets securing thatparticular loan class (fields 686, 687, 688, 689, 690 or 691) by theGlobal Funded Principal for that loan class (fields 680, 681, 682, 683,684 or 685, respectively) as indicated in: step 692 for DIP loans; step693 for senior secured loans; step 694 for subordinated secured loans;step 695 for senior unsecured loans; step 696 for subordinated unsecuredloans; and step 697 for other loans. This process is repeated for eachof the various loan classes (e.g. DIP, senior secured, subordinatedsecured, senior unsecured, subordinated unsecured and other) for eachcredit facility in the distressed credit facility portfolio.

Database Model Workout Strategy—Borrower's Debt Capacity

The entry of a workout strategy in connection with the loans included inthe distressed credit facility described briefly above in connectionwith the step 188 of FIG. 3 is described in more detail in connectionwith FIGS. 14A-14D in the illustrative example. As shown in FIG. 14A,the collateral manager may input certain assumptions into the databasemodel for the borrower's debt capacity and perform certain calculationsto determine a borrower's total debt capacity, as follows: an annualrevenue assumption (for example, LTM revenues (field 352, FIG. 10A)adjusted by any upward or downward trend during the interim (or “stub”)period or by the projections of any third party advisors or recentwritten appraisals included in the loan documentation) may be entered ina field 704; an EBITDA assumption (determined by the collateral managerbased on, for example, LTM EBITDA (field 402, FIG. 10D) adjusted by anyupward or downward trend during the stub period or by the projections ofthird party advisors or recent written appraisals included in the loandocumentation) may be entered into a field 706; a maintenance CAPEXassumption (determined by the collateral manager based on LTM CAPEX(field 404, FIG. 10D) adjusted by any upward or downward trend duringthe stub period or by the projections of third party advisors or recentwritten appraisals included in the loan documentation) may be enteredinto a field 708; the EBITDA-CAPEX (sometimes referred to as “free cashflow”) assumption may be computed by subtracting the CAPEX assumption infield 708 from the EBITDA assumption in field 706 and stored in a field710; a targeted coverage for (EBITDA-CAPEX)/interest may be set (forexample, at 2.0 times or another multiple determined appropriate by thecollateral manager) and entered in field 712; the maximum annualinterest expense the borrower is likely able to pay may be calculated bydividing free cash flow (EBITDA-CAPEX, field 710) by the targeted(EBITDA-CAPEX)/interest coverage (field 712) and stored in a field 714;an interest rate assumption (determined by the collateral manager basedon, for example, recent prevailing interest rates and trends) may beentered into a field 718; and the borrower's total debt capacity may becalculated by dividing maximum annual interest expense (field 714) bythe assumed interest rate (field 718) and stored in a field 720.

Database Model Workout Strategy—Liquidation Analysis

As shown in FIG. 14B in the illustrative example, a liquidation analysismay be performed for various asset classes of the borrower by inputtinglow and high estimates of recovery value for each asset categoryincluded in field 722 (fields 444, 446, 448, 450, 452, 454, 458, 460,464, 466 and 468 of FIGS. 10G and 10H). These estimates are often basedon historical studies of liquidation recoveries for particular assetclasses by industry, written appraisals or other documentation includedin the loan documentation, estimates obtained from professionalliquidators or other experts, and the experience of the collateralmanager. For example, low recovery estimates for industrial inventoriesmay be in the range of 10-30% of book value, with high recoveryestimates being in the range of 30-50% of book value. As anotherexample, equity method investments, related party items and goodwill areoften given a 0% recovery estimate. As a further example, PP&E is oftengiven a low recovery estimate in the range of 10-20% of book value, anda high recovery estimate in the range of 20-40% of book value. Theestimates may be entered into an array of respective fields 724 (for“low” estimates) and 726 (for “high” estimates), together with anyrelated notes or comments of the collateral manager (field 728). A loopmay be provided between a step 722 and a step 730 for enumerating eachof the asset categories of the borrower, such that low and highestimates and related notes or comments can be put into the respectivefields 724, 726 and 728 for each asset category.

A field 732 may be provided for the book value for each asset class tobe displayed next to the corresponding low liquidation recovery estimateand high liquidation recovery estimate for the asset class. The bookvalue for total current assets may be set as the value in field 456(FIG. 10E) and stored in field 734. The low recovery estimate for totalcurrent assets may be calculated as the sum of the respective fields 724for each of the current asset categories (fields 444, 446, 448, 450, 452and 454 of FIG. 10E) and stored in a field 736. The high recoveryestimate for total current assets may be calculated as the sum of therespective fields 726 for each of the current asset categories (fields444, 446, 448, 450, 452 and 454 of FIG. 10E) and stored in a field 738.The book value for total assets may be set as the value in field 472(FIG. 10H) and stored in a field 740. The low recovery estimate fortotal assets may be calculated as the sum of the respective fields 724for each of the asset categories (fields 444, 446, 448, 450, 452, 454,458, 460, 464, 466 and 468 of FIGS. 10G AND 10H) and stored in a field742. The high recovery estimate for total assets may be calculated asthe sum of the respective fields 726 for each of the asset categories(fields 444, 446, 448, 450, 452, 454, 458, 460, 464, 466 and 468 ofFIGS. 10G AND 10H) and stored in a field 744.

Referring to FIG. 14C in the illustrative example, for each class ofloan in each credit facility in the distressed credit facilityportfolio, a field 746 may be provided for the entry of low and highestimates of various fees and expenses which may be incurred inconnection with a liquidation of the borrower, such as wind-downexpenses, trustee fees, professional fees (attorneys, accountants andothers) and administration expenses (other than DIP financing expenses).These estimates may be entered into an array of respective fields 748(FIG. 14C) (for “low” estimates) and 750 (for “high” estimates),together with any related notes or comments of the collateral manager(field 752). The low and high estimates and related notes or commentsmay be stored in the respective fields 748, 750 and 752 for each expensecategory. The low estimate for all the listed expense categories may becalculated as the sum of the respective fields 748 for each of theexpense categories and stored in a field 756. The high estimate for allthe listed expense categories may be calculated as the sum of therespective fields 750 for each of the expense categories and stored in afield 758. A low estimate of amount available to other creditors (afterpayment of liquidation expenses) may be calculated by subtracting fromthe low recovery estimate for total assets (field 742) the high estimateof liquidation expenses (field 758) and stored in a field 760. A highestimate of amount available to other creditors (after payment ofliquidation expenses) may be calculated by subtracting from the highrecovery estimate for total assets (field 744) the low estimate ofliquidation expenses (field 756) and stored in a field 762. This processis repeated for each class of loan in each credit facility in thedistressed credit facility portfolio.

Turning to FIG. 14D in the illustrative example, a field 802 may beprovided for entry of whether the borrower has a “simple” (e.g., onlybank debt) or “complex” (e.g., includes bonds, debentures, subordinateddebt, separate receivables facility, and/or other facility) capitalstructure. For each loan in each credit facility in the distressedcredit facility portfolio, field 804 may be provided for entry of a“positive” (e.g., lender has an agent or other lead position, such as amajority of the debt class, or the collateral manager has an interest infollowing the lead position held by another lender in the bank group) or“negative” (e.g., lender has a blocking position with respect toforbearances, waivers and/or amendments, or the collateral manager hasan interest in following such a position held by another lender in thebank group) control objective. A field 806 may be provided for entry ofa narrative explanation of the debt workout strategy formulated by thecollateral manager for a particular loan or a particular creditfacility. This narrative may address matters such as industrycyclicality, a qualitative description of company circumstancesparticular to the borrower and/or industry and economic circumstancesaffecting other companies in the industry, whether or not management islikely to be replaced, whether or not a financial advisor has been orshould be retained, the likeliness of any forgiveness of debt (commonlyreferred to as a “haircut”), whether payments to subordinated debtholders can or should be blocked, the likelihood of a sale of theborrower, or a sale or sales of its assets, or its bankruptcy. A field808 may also provided for entry of an update date (e.g., most recentpricing date or most recent collateral valuation date).

Process for Determining Workout Parameters

An exemplary process for entry of workout parameters, mentioned above inconnection with the step 190 of FIG. 3, is described in more detail inconnection with FIGS. 15A-15I and 16A-C in the illustrative example,which provide an interactive quantitative input/output pricing interfaceand engine. This process may be organized by way of a database model asdiscussed below.

Initially, as shown in FIG. 15A in the illustrative example, for eachloan included in each credit facility, general loan information may beentered in step 810, such as: Global Commitment (field 310, FIG. 7C);Global Funded Principal (field 311, FIG. 7C); anticipated or actual SPEcommitment as determined by the collateral manager (often equal toCommitment Offered (field 316, FIG. 7C); anticipated or actual SPEfunded principal, as determined by the collateral manager (often equalto Funded Principal Offered (field 317, FIG. 7C); SPE percentage, whichmay be calculated as the ratio (expressed as a percentage) ofanticipated or actual SPE commitment divided by Global Commitment (field310, FIG. 7C); term/revolver/other loan type (from field 246, FIG. 7A);interest payment status (from field 296, FIG. 7C) and cash interestpayment rate (from field 282, FIG. 7B). At the same time, a cash flowgrid, for example, a spreadsheet, database, or other suitable construct,for example, may be constructed in step 840 with dates for monthlyperiods beginning with the anticipated pricing date of the proposeddistressed credit facility portfolio purchase assigned as the datecorresponding to period zero and with each succeeding period or row inthe cash flow grid being populated with the date corresponding to thelast day of each succeeding month following the pricing date over aperiod of 84 months or such other period as the collateral manager maydetermine. Thereafter, initial loan balances in the cash flow grid foreach loan included in each credit facility are set equal to the GlobalCommitment and Global Funded Principal for the loan (fields 310 and 311,respectively, of FIG. 7C) in step 850. A beginning Global Commitment andan ending Global Commitment for each monthly period, based on therespective ending value of the immediately prior month is alsocalculated in step 850. Next in step 860, the amount of unfundedcommitment for the loan (the “Unfunded Commitment”) for each period inthe cash flow grid is calculated as the difference between the GlobalCommitment and Global Funded Principal and stored, for example, in adatabase model. The loan's performance characteristics as performing-1,performing-2, or impaired based on the collateral manager's review ofthe due diligence materials provided by the lender (step 102, FIG. 1) isinput in step 870. Additional data, information and values which may beincluded in the cash flow grid are described below.

As shown in FIG. 15B in the illustrative example, a field 880 may beprovided in the database model for entry of a prediction by thecollateral manager as to whether interest will continue to be paid atthe current cash pay rate. Thereafter, an interest rate look-up table,for example, a spreadsheet or database or any other suitable program maybe populated, based on the prediction entered into the field 880. Moreparticularly, if the prediction is that interest will continue to bepaid at the current cash pay rate, then in step 882, an interest ratelook-up table may be populated with the current rate. Otherwise, a field884 may be provided for entry of a revised initial interest rate, basedon workout assumptions entered in step 806 (e.g., likely a higher rate;in light of the poor credit quality, perhaps as high as the default rate(field 290, FIG. 7B)); and the interest rate look-up table with therevised initial interest rate entered in the field 884 is populated instep 886.

In either case, based upon loan workout assumptions, first, second, andthird interest rate change dates and corresponding rates may be enteredfor each loan into fields 888, 890, 892, 894, 896 and 898, respectively.The interest rate look-up table with respective first, second, and thirdinterest rate change dates and rates for each loan is populated in step900. The cash flow grid may include an “INT RATE” field. In step 902,the “INT RATE” field of the cash flow grid for each loan is populatedwith the corresponding value from the interest rate look-up table foreach month represented in the cash flow grid (e.g., months 1 through 84in the illustrated example).

As shown in FIG. 15C in the illustrative example, a field 910 may beprovided for entry of an anticipated principal amortization stream foreach loan in each credit facility that is based, not on the contractualamortization table, but rather on the collateral manager's loan workoutassumptions entered in field 806, FIG. 14C. More particularly, for eachof up to three payment streams (although the field 910 could easily beexpanded to include additional payment streams), the field 910 may bepopulated with an amortization start date, a payment frequency (e.g.,monthly, quarterly, annually), a number of payments, and a dollar amountof each payment on a global basis. In step 920, three look-up tables(one per payment stream) are populated from the anticipated amortizationinput data entered in the field 910. The cash flow grid may include a“PRIN AMORT” field that may be used for the amount of anticipatedprincipal amortization for each respective month in the cash flow grid,such values being obtained from the anticipated amortization look-uptable for each loan in step 930. The cash flow grid may also contain a“FUNDED PRIN BEFORE HAIRCUT” field 940. For each loan and each period inthe cash flow grid, field 940 may calculate a tentative principalbalance subtotal (“funded principal before haircut”) equal to thebeginning funded principal (step 850, FIG. 15A), plus additionalprincipal draw downs made by the borrower during the period (which maybe input by the collateral manager based on due diligence informationprovided by the lender, the First Agent, the Second Agent and/or asotherwise may be determined by the collateral manager), less anticipatedprincipal amortization for that loan period. For purposes of thisdiscussion, “haircut” has its common meaning in lending parlance, namelya forgiveness, discount or other reduction in the outstanding principalamount resulting other than from a payment made by or on behalf of aborrower.

As shown in the illustrative example in FIG. 15D, a “date of interimhaircut” (if any) for the borrower may be determined by the collateralmanager based on the loan workout assumptions (field 806, FIG. 14B) andentered into a field 942. Thereafter, a look-up may be performed on thecash flow grid to obtain for all loan facilities of the borrower thefunded principal before haircut for the date of interim haircut (step944). A haircut percentage may determined by the collateral managerbased on the loan workout assumptions (field 806, FIG. 14B) and enteredinto a field 946 and an indication may be entered into a field 948 foreach loan included in each credit facility to indicate whether that loanwill be affected by the haircut. A dollar amount of haircut for eachloan is calculated in step 950 by multiplying the funded principalbefore haircut by the haircut percentage of field 946. An override valuefor haircut for each loan may be entered into a field 952 and apost-haircut funded principal balance for each loan may be calculated instep 954. In the illustrative example, the field “FUNDED PRIN AFTER HC”is assigned the value of the “post-haircut funded principal balance” forthe month of the date of interim haircut, as read from the cash flowgrid for each loan. In addition, in the illustrative example, for allsubsequent periods the “FUNDED PRIN BEFORE HAIRCUT” amount is set equalto the post-haircut funded principal balance in step 956.

As shown in the illustrative example in FIG. 15E, a field 958 may beprovided for entry of a description of a first paydown (i.e., mandatoryprepayment required by the loan documents) event (e.g., a mandatoryprepayment of principal resulting from a sale of a borrower's assets)and a field 960 for entry of a date of the first paydown event. Thefunded principal balance is obtained in step 962 from the cash flow gridfor the period including the date of the first paydown event (after anyamortization and haircut). A step 964 may be provided for entry of anindication of whether, in the view of the collateral manager, the loanwill benefit from the paydown event (“Exclude loan from apportionment?”“No”—if the loan will benefit; “Yes”—if the loan will not benefit.) Aratio (based on outstanding Global Funded Principal) of each loan thatwill benefit from the paydown event (a “paydown loan”) to total paydownloans (i.e., all loans that will benefit from the paydown event) may bedetermined in step 966. A field 968 may be provided for entry of anamount of global paydown (i.e., payment of outstanding Global FundedPrincipal) anticipated as a result of the paydown event; and anapportionment of the global paydown to a particular loan in the creditfacility may be determined and stored in a field 970. Any override ofpaydown for each loan may be entered into a field 972 of the cash flowgrid and then in step 974 a determination may be made for each loan andeach periodic (e.g., monthly, etc.) activity record whether the paydownoccurs in that period, based on the paydown information in the cash flowgrid. Further, the cash flow grid may include a “PRINCIPAL PAYDOWNS”field, and in situations where a paydown does occur in a given period,the “PRINCIPAL PAYDOWNS” field of the cash flow grid may acquire theamount of the paydown (calculated but subject to override) in step 974.The ending Global Funded Principal may be calculated in step 976 for theloan for each corresponding time period by subtracting the applicablepaydown from the Global Funded Principal (as determined prior topaydowns). This process is repeated for every loan in every creditfacility in the portfolio.

FIG. 15F (which includes fields 980, 982, 984, 986, 988, 990, 1000,1002, 1004 and 1006) and 15G (fields 1008, 1010, 1012, 1014, 1016, 1018,1020, 1022, 1024 and 1026) are identical to corresponding fields/stepsof FIG. 15E, except that FIG. 15F pertains to a “second paydown event,”and FIG. 15G pertains to a “third paydown event.” Accordingly, referencemay be made to the foregoing description of FIG. 15E for an explanationof the processing performed by the flowcharts of FIGS. 15F and 15G.

As shown in the illustrative example in FIG. 15H, a description of finalexit may be entered into a field 1028, and a date of final exit may beentered into a field 1030. The Global Funded Principal balanceoutstanding as of the date of the final exit (after any amortization andhaircut) may be obtained in step 1032 from the cash flow grid. Thedatabase model for each loan in the credit facility also may include afield 1034 for an indication of whether, in the view of the collateralmanager, the loan will benefit from the final exit (“Exclude loan fromapportionment?” “No”—if the loan will benefit; “Yes”—if the loan willnot benefit.). In step 1036 the ratio (based on outstanding GlobalFunded Principal) of each paydown loan to the total of paydown loans(i.e., a loan that will benefit from the final exit) may be calculated.A field 1038 may store an amount of global paydown resulting from thefinal exit for the entire credit facility, and the apportionment of thetotal paydown to each loan in the credit facility may be determined instep 1040. Any override of paydown for each loan may be stored in afield 1042 in the database model for that loan, and an alternative finalhaircut percentage may be stored in a field 1044. The final-exit paydownamount may be determined in step 1046.

As shown in the illustrative example in FIG. 15I, a determination may bemade in step 1048 from the final paydown information for each loan andeach monthly (or other periodic) activity record whether the paydownoccurs in that month, and, if so, the amount of the paydown may bedetermined from the “PRINCIPAL PAYDOWNS” field the cash flow grid. Theprincipal balance of each loan may be set to zero to reflect debtextinguishment in step 1050. A field 1052 may be provided for theanticipated or actual equity kicker date (if any) for each loan (e.g.,the date the borrower is sold to a third party, or is recapitalized orthe borrower has its debt restructured), and a field 1054 may beprovided for the anticipated or actual value (if any) of the equitykicker for each loan. As used herein, “equity kicker” has its commonmeaning in lending parlance, namely an interest in the equity of theborrower (e.g., capital stock, membership or partnership interests, orwarrants, options or other rights to acquire an equity interest, whichare obtained in connection with a restructuring or refinancing ofexisting debt or the issuance of new debt, or in connection with thegranting of a forbearance, waiver, forgiveness of debt or otheraccommodation, or an interest calculated with reference to theborrower's profits or the performance of its equity). The value of anequity kicker is based on the anticipated or actual value of theborrower's total equity on the final payment date, the portion of theequity held by the holder of the equity kicker, subject to anyapplicable preferences and/or discounts.

Calculation of Loan Valuation

As described above in connection with steps 186, 188, 190, and 192 ofFIG. 3, after the collateral manager enters collateral value estimates,a workout strategy, and workout parameters for each of the loans in eachcredit facility in the distressed credit facility portfolio, a loanvaluation is calculated for each loan. The loan value calculationsidentified as step 192 of FIG. 3 are now described in detail inconnection with the illustrative example in FIGS. 16A-16C.

As shown in the illustrative example in FIG. 16A, a determination may bemade in step 1056 from the final equity kicker information in the cashflow grid for each loan and for each monthly activity record whether anequity kicker occurs in that month, and, if so, then the value of theequity kicker may be placed in the “EQUITY KICKER” field of the cashflow grid. A field 1058 may be provided for dates of up to six amendmentfees and restructuring fees, and a field 1060 may be provided for theglobal amount for each loan of any amendment fee or restructuring feecorresponding to each of the dates entered via the field 1058. Theamendment fee and restructuring fee information in the cash flow gridfor each loan and each monthly activity record may be evaluated in step1062 to determine whether any such payment occurs in that month for theloan. If so, the fee payment amount is placed in the “OTHER FEES” fieldof the cash flow grid for that loan.

As shown in the illustrative example in FIG. 16B, in step 1064, theinterest payment may be computed for each monthly (or other periodic)record of each loan as a product of the average of the beginning andending Global Funded Principal for the month (or period), the applicableinterest rate, and the number of days in the month or other perioddivided by 360 (assuming a 360-day calendar year). The cash flow may becalculated in step 1066 for each monthly (or other periodic) record foreach loan as the sum of principal amortization, principal paydowns,equity kicker, interest payment, commitment fees and other fees for thatloan for that monthly period. The total number of elapsed quarters inthe loan period may be determined in step 1068 by dividing the number ofdays through the payment date (using a 360-day calendar year) by 90. Thecash flow for each monthly (or other periodic) record of each loan maybe recalculated in step 1070 using the time calculated by the step 1068and target internal rate of return (“target IRR”) (step 1072, aspreviously set by the collateral manager in step 552, FIG. 11). Theresulting cash flow value is stored in the “DISCOUNTED CASH FLOWS” fieldof the cash flow grid, and the “DISCOUNTED CASH FLOWS” values for allrecords are aggregated and divided by the beginning Global FundedPrincipal for each loan to obtain the “price” expressed as a percentageof Global Funded Principal.

Calculation of “Invoice” and Values to be Displayed in the Loan PricingSummary

As shown in the illustrative example in FIG. 16C, for each loan a“payment for funded principal” may be calculated in step 1074 as aproduct of the Funded Principal Offered (field 317, FIG. 7C) and the“price” determined as a percentage in step 1070, FIG. 16B. For each loanthe amount of “unfunded principal offered by lender” may be calculatedin step 1075 as the difference of the Commitment Offered (field 316,FIG. 7C) minus the Funded Principal Offered (field 317, FIG. 7C). The“credit for unfunded principal” for each loan may be calculated in step1076 as a product of the amount of unfunded principal offered by lenderand the inverse of the price (i.e., one minus the price) expressed as apercentage. The “net invoice” for each loan may be calculated in step1078 by subtracting the credit for unfunded principal determined in step1076 from the payment for funded principal determined in step 1074. Foreach loan in a credit facility the following data may be aggregated instep 1080: Commitment Offered (field 316, FIG. 7C); Funded PrincipalOffered (field 317, FIG. 7C); payment for funded principal (step 1074);credit for unfunded principal (step 1076); and net invoice (step 1078).The weighted average price for funded principal (as a percentage) isdetermined in step 1082 by dividing the aggregate payment for fundedprincipal determined from step 1080 by the aggregate Funded PrincipalOffered.

Due Diligence Reports

After the loan valuation for each loan is calculated (step 192 FIG. 3),such as in the foregoing manner, due diligence reports 194 and anynecessary or desirable ad hoc reports 196 may be generated as desired.These reports may be used, for example, by credit rating agencies for“shadow rating” the individual loans in the distressed credit facilityportfolio and/or determining a recovery rate for each loan in thedistressed credit facility portfolio. FIGS. 17A-17E illustrate thecontent of exemplary due diligence reports. In addition to those duediligence reports 194, ad hoc reports 196 (FIG. 3) may be developedincluding any appropriate subsets of the information contained in thedue diligence reports 194, formatted as appropriate to suit the needs ofthe collateral manager, the credit rating agencies, the lenders, amonoline or other insurer, or others.

Overview of the Rating Agency Model

FIG. 18 illustrates a high-level summary of a rating agency model inaccordance with the present invention. Initially, using the loandatabase models as described above, summary portfolio information isderived in step 1090 by extracting data from the loan database model andaggregating that data. The results of this aggregation are then analyzedin step 1092 to confirm that the distressed credit facility portfolio asa whole meets basic performance parameters as described in more detailbelow. A capital structure is constructed in step 1094 forimplementation by an SPE used to hold and securitize the distressedcredit facility portfolio. Thereafter, the constructed capital structuremay be tested and evaluated by the collateral manager in step 1096 byspecifying multiple default/recovery scenarios; generating cash flowscorresponding to those scenarios in step 1098, and simulating cash flowwaterfalls associated with the default/recovery scenarios in step 1100.This process is repeated for each scenario via step 1102.

Preparation of Summary Portfolio Information

Referring to FIG. 19, the process described above in connection withFIG. 18 is illustrated and described in more detail in connection withthe illustrative example in FIG. 19 (FIG. 18, step 1090). Moreparticularly, the loan database model may be read in step 1104, andcertain information may be extracted from the loan database model instep 1106. More specifically, for each loan described in the loandatabase model, the following information may be extracted: a loan I.D.number (field 238, FIG. 7A), the Commitment Offered (field 316, FIG.7C), the Funded Principal Offered (field 317, FIG. 7C), the payment forfunded principal (field 1074, FIG. 16C), the credit for unfundedprincipal (field 1076, FIG. 16C), the type of facility (e.g., term orrevolver) (field 246, FIG. 7A), the performance category of the facility(e.g., performing-1, performing-2, or impaired) (field 870, FIG. 15A),the contractual interest rate (step 568, 576, 578 or 580, FIG. 12A) andrevolving commitment fee rate (field 292, FIG. 7C), if any, and theLIBOR rate or prime rate, as applicable, as of the pricing date (field556, FIG. 11).

In step 1108, computations may be performed to calculate the followingamounts for the distressed credit facility portfolio: aggregateCommitments Offered (as the sum of the Commitment Offered for all loansin the distressed credit facility portfolio); aggregate Funded PrincipalOffered (as the sum of the Funded Principal Offered for all loans in thedistressed credit facility portfolio); aggregate payment for fundedprincipal (as the sum of the payment for funded principal for all loansin the distressed credit facility portfolio); aggregate credit forunfunded principal (as the sum of the credit for unfunded principal forall loans in the distressed credit facility portfolio); aggregate fundedprincipal for term loans (as the sum of funded principal for all termloans in the distressed credit facility portfolio); aggregate fundedprincipal for revolving loans (as the sum of the funded principal forall revolving loans in the distressed credit facility portfolio);aggregate commitment for performing-1 loans (as the sum of CommitmentOffered for all performing-1 loans in the distressed credit facilityportfolio); aggregate commitment for performing-2 loans (as the sum ofCommitment Offered for all performing-2 loans in the distressed creditfacility portfolio); aggregate commitment for impaired loans (as the sumof Commitment Offered for all impaired loans in the distressed creditfacility portfolio); weighted average price for funded principal (as theaverage determined by dividing the sum of the payment for fundedprincipal for all loans in the distressed credit facility portfolio bythe aggregate Funded Principal Offered of all loans in the distressedcredit facility portfolio); weighted average contractual interest rate(as the average determined by dividing (i) the sum of the product of thecontractual interest rate on each loan times the funded principal amountof that loan for all loans in the portfolio, by (ii) total fundedprincipal amounts for all loans in the distressed credit facilityportfolio); and weighted average revolving commitment fee (as theaverage determined by dividing the sum of the revolving commitment feefor all revolving loans by total unfunded revolving commitment).

Assurance that the Portfolio Meets Basic Performance Parameters

Step 1092 (FIG. 18) for confirming that the distressed credit facilityportfolio meets basic performance parameters is now described in moredetail in connection with the illustrative example in FIG. 20. As shown,a percentage may be calculated in step 1110 of aggregate commitmentsincluded in the distressed credit facility portfolio represented byloans in each of the categories performing-1, performing-2, andimpaired. In step 1112, a determination is made whether the portfoliocontains sufficient performing loans (i.e., loans in the performing-1and performing-2 categories). There is no definitive rule governing thesufficiency of performing loans in a portfolio, but, in general, (i)impaired loans should not exceed 25% of the aggregate loan commitments,and (ii) loans expected to continue to pay interest (i.e., performing-1loans) should comprise no less than 45% of all performing loancommitments (i.e., performing-1 and performing-2 loans combined). If itis determined in step 1112 that the distressed credit facility portfoliodoes not contain sufficient performing loans, then the portfolio isrebalanced in step 1114 to increase the overall proportion of performingloan commitments to total commitments or the proportion of performing-1loans to total performing loans. This re-balancing of the portfolio canbe achieved either by increasing the number of performing-1 loans and/orperforming-2 loans, as necessary by introducing additional creditfacilities of performing borrowers (which generally will include thereiteration of prior process including the preparation of loan databaseinformation for any additional borrowers and loans), or by reducing thenumber of performing-2 loans and/or impaired loans included in thedistressed credit facility portfolio. In general, criteria are chosen todetermine the number and character of performing loans needed in theportfolio to provide a desired degree of assurance that the SPE will beable to cover all of the underlying expenses (e.g., franchise fees andadministrative costs, including collateral management fees, collateralliquidation costs, professional fees, etc.), pay interest as due andpayable, repay the credit-rated debt in full and provide the targetreturn on equity in full using principal and interest cash inflows fromthe underlying portfolio of credit facilities. This process is repeateduntil the portfolio contains sufficient performing loans.

Construction of an SPE Capital Structure—Assets

Step 1094 (FIG. 18) for constructing an SPE capital structure forsecuritizing the distressed credit facility portfolio in accordance withthe principles of the present invention is now described in more detailin connection with the illustrative example in FIGS. 21A-21D. Moreparticularly, in step 1116, the following data may be retrieved: theaggregate loan commitments; aggregate funded principal, aggregaterevolving loan commitments (total and funded), and aggregate term loancommitments, as well as the aggregate funded price, weighted averagefunded price, and aggregate credit for unfunded commitments for thedistressed credit facility portfolio (computed as described above inconnection with the step 1108 of FIG. 19). An additional purchase priceamount as a percentage of funded principal is calculated in step 1118 inthe illustrative example. This percentage, which may be in the range of10-15% of the funded principal amount and may comprise as much as 25% ofthe total purchase price paid to the lender, will be determined as aresult of negotiations with the lender, and reflects the additionalvalue paid to the lender over what the lender would otherwise havereceived in a bulk sale of the distressed credit facility portfolio foran all cash price. As an example, the additional purchase price may be10% if it may be paid in the form of a “cash pay note,” or may be 15% ifit may be paid as a “five-year discount note.” It should be noted thatthe dollar amounts and percentages shown in the accompanying drawingfigures and/or described herein are simply examples, and no limitationis intended thereby. The dollar amounts and/or percentages may varybased on credit rating agency stress requirements applicable at the timeof the proposed securitization. The method of the present invention maybe employed to securitize a distressed credit facility portfolio of anysuitable size, and appropriate numbers or percentages may be substitutedfor those described herein, as will be readily appreciated by those ofordinary skill in the art.

In the illustrated example, the aggregate funded principal is $850million, such that the additional purchase price is $85 million ($850million×10%). The net purchase price for the distressed credit facilityportfolio is calculated in step 1120 as the sum of aggregate fundedprice (step 1116 (step 1094, FIG. 18, step 200, FIG. 3)) and theadditional purchase price computed in step 1118, less any credit foraggregate unfunded commitments from step 1116. In the illustratedexample, the net purchase price is computed to be $485 million, as shownin step 1120, FIG. 21A. In step 1122 in the illustrated example, aninitial balance of $101 million is established for a Senior InterestReserve Account, computed as 10.1% of aggregate commitments ($1billion×10.1%). In step 1124 in the illustrated example, an initialbalance of $11.5 million is established for a Subordinated InterestReserve Account, computed as 1.15% of aggregate commitments ($1billion×1.15%). An initial balance is also established in step 1126 foran Unfunded Revolver Discount Account (“URDA”), equal to the credit forunfunded principal ($67.5 million).

As shown in the illustrative example in FIG. 21B, in step 1128, theinitial balances are established for other reserve accounts, such as,for example, an Overadvance Reserve Account (for making subsequent DIPloans, last-in-first-out (“LIFO”) loans, or over advances to salvage orenhance the value of loans in the SPE), a Closing Expense Account (forclosing expenses, syndication fees, structuring fees, legal, accountingand other professional fees incurred in connection with the closing, andother transaction-related fees and expenses, a Professional Fees Account(for legal, accounting and other professional fees and expenses inconnection with ongoing administration or workout of the loans in theSPE), an Interest Rate Cap Account (for funds to acquire an interestrate cap to enhance interest reserves if LIBOR rises or increases), andan Expense Account (for ongoing accounting, reporting and otheradministrative fees and expenses of the SPE). The initial amounts placedin these various reserve accounts are determined by the collateralmanager (for example, based on the historical needs of the borrowers asdetermined from the loan documentation and/or based on the workoutstrategy and/or the relative composition of the performance baskets(performing-1, performing-2 and impaired)). The accounts are funded atthe closing of the securitization from the proceeds of the issuance andsale of the SPE's securities.

A subtotal of assets in the SPE is computed in step 1130 in theillustrative example as the sum of the net purchase price (step 1120),the Senior Interest Reserve Account (step 1122), the SubordinatedInterest Reserve Account (step 1124), the URDA (step 1126), and theother reserve accounts (step 1128), such as the Overadvance ReserveAccount, the Closing Expense Account, the Professional Fees Account, theInterest Rate Cap Account, and the Expense Account and that subtotal isassigned to a tentative total of SPE assets. This subtotal does notinclude any amount in the “Class A-3 Revolving Reserve Account,”described below.

In the illustrative example, “A-3 Notes” are term notes, in contrast to“A-1 Notes” and “A-2 Notes” which are revolving notes. The A-1 Notes andA-2 Notes are sometimes referred to herein as “Class A Revolving Notes”or “Class A-1/A-2 Revolving Notes.” The A-3 Notes are sometimes referredto herein as “A-3 (term) Notes” or “Class A Term Notes.” The A-1 Notes,A-2 Notes and A-3 Notes are sometimes referred to herein collectively asthe “Class A Notes.” In the illustrative example, all the “A-1 Notes,”“A-2 Notes” and “A-3 Notes” are underlying “AA/Aa1” notes, which areenhanced to a “AAA/Aaa” rating (i.e., the highest investment graderating) from one or more selected credit rating agencies as a result ofa financial guaranty insurance policy (i.e., a “wrap policy”) from amonoline or other insurer (such an enhancement sometimes being referredto herein as a “credit enhancement” and any monoline or other insurer,surety or similar entity providing such a wrap policy or creditenhancement sometimes being referred to herein as a “Class A creditenhancer”). As used herein, “wrap policy” has its common meaning insecuritization parlance, namely a financial guaranty insurance policy,surety bond or similar protection that insures the payment in full ofthe principal and interest on notes or other securities. In asecuritization, as in the illustrative example, which includes a creditenhancement for the Class A Notes, if at any time the SPE waterfalls (asdescribed below) are insufficient to pay principal and interest on theClass A Notes, or senior expenses (as described below) of the SPE, thensuch amounts will be paid by the Class A credit enhancer (eitherdirectly, or by paying an equivalent amount to the SPE) and are treatedby the SPE as Class A Notes credit enhancement liabilities subject tofuture repayment by the SPE, and appropriate accounting entries are madeto reflect this treatment.

The Class A-3 Revolving Reserve Account is a pre-funded reserve fundedon the closing date of the securitization from a portion of the proceedsof the sale of the A-3 Notes, and is intended to emulate the additional,unfunded commitment of the Class A Revolving Notes (i.e., the A-1 Notesand the A-2 Notes), so that each $1 million of Class A Notes effectively“owns” the same percentage of each credit facility (in contrast to just“owning” underlying term loans or underlying revolving loans). In otherwords, unfunded commitments (both term and revolving) will be funded byboth term and revolving Class A Notes to keep balances correct, so thateach $1 million of asset backed Class A Notes is supported by the sameloans and in the same percentages. The operation of this relationship isdescribed in more detail below in connection with FIG. 21D and FIG. 22.

In step 1132, a calculation may be made of the amount of unfundedcommitments in the distressed credit facility portfolio by subtractingthe aggregate funded principal (step 1116, FIG. 21A) from the aggregateloan commitments (step 1116, FIG. 21A). In step 1134, anothercalculation is made to determine the portion of the unfunded commitmentsthat is to be supported jointly by “Class A-1/A-2 Revolving Noteavailability” and “Class A-3 Revolving Reserve Account.” That portion iscalculated by subtracting the URDA balance (step 1126, FIG. 21A) fromthe unfunded portfolio commitments, calculated in step 1132. Arelationship then may be established in step 1136 between the combinedClass A-1/A-2 Revolving Note availability and Class A-3 RevolvingReserve Account and the calculated unfunded portfolio commitments to besupported by those accounts.

Calculation of SPE Capital Structure—Capitalization

As shown in the illustrative example in FIG. 21C, a calculation is madein step 1138 to determine the tentative equity for the SPE capitalstructure as 3% of tentative total SPE securities (rounded up to, forexample, the nearest $500,000). It should be noted that, based on U.S.generally accepted accounting principles in effect at the date of thisapplication, the equity sold to third parties (independent of thelender) must comprise at least 3% of the total securities (by principalamount or cost) of the SPE in order for a lender to remove thedistressed credit facility portfolio from its financial statements. Inthe illustrated example, this tentative equity value is 3% of$708,500,000, or $21.5 million (rounded up to the nearest $250,000).This tentative equity amount is iteratively updated by the processillustrated in steps FIGS. 21C-21D and upon its final iteration mustequal the equity percentage (greater than or equal to 3%) times SPEtotal securities (by principal amount or cost), or $22.5 million in theillustrated example. More particularly, in the illustrated example, acalculation is made in step 1140 (FIG. 21C) to determine a par amount ofClass C Notes equal to 12% of aggregate funded principal (e.g., $101.7million) and a Class C Notes issue price equal to 10% of the face amount(e.g., $85 million). In step 1142 in the illustrated example, acalculation is made so that an amount of Class B Notes is equal to 5.6%of the aggregate funded principal, rounded up to the nearest $250,000(e.g., $47,750,000). In step 1144 in the illustrated example, thecollateral manager specifies an A-3 (term) Note amount (e.g., $250million, based on the amount the collateral manager anticipates can besold in the market).

As shown in the illustrative example in FIG. 21D, a computation is madein step 1146 to determine an amount of tentative funded Class ARevolving Notes by subtracting from the tentative total of SPE assets,the tentative SPE equity, the Class C Notes (field 1140), the Class BNotes (field 1142), and the A-3 (term) Notes (field 1144). A system ofsimultaneous equations is solved in step 1148 in the illustrativeexample to determine the initial Class A-3 Revolving Reserve Accountamount. The simultaneous equations are as follows: (i) Class A RevolvingNotes commitment is calculated as the sum of the tentative amount offunded Class A Revolving Notes and Class A Revolving Notes availability;(ii) total Class A commitment is calculated as the sum of the Class ARevolving Notes commitment and the A-3 (term) Notes; and (iii) thefraction whose numerator is Class A Revolving Notes Availability andwhose denominator is the value calculated in field 1134 (i.e., thedifference obtained by subtracting the URDA from the unfunded portfolioamount, or $82.5 million in the illustrative example) is set equal tothe fraction whose numerator is Class A Revolving Notes commitment andwhose denominator is total Class A Notes commitment. In step 1150 in theillustrated example, a determination is made of the tentative total SPEassets as the sum of the SPE asset subtotal and the Class A-3 RevolvingReserve Account amount. In step 1152, a determination is made whetherthe tentative total amount of SPE assets is equal to the sum of thetentative funded Class A Revolving Notes, the A-3 Notes, the Class A-3Revolving Reserve Account, the Class B Notes, the Class C Notes, and thetentative SPE equity. If not, the process described above is repeatedand another iteration of the calculations is performed.

FIG. 22 depicts an exemplary spreadsheet representation of an SPEcapital structure developed by the process illustrated in FIGS. 21A-21D.The capital structure includes “SOURCES OF FUNDS” shown on the righthand side of FIG. 22, “USES OF FUNDS” shown on the left hand side ofFIG. 22, and other information regarding the SPE capital structuredeveloped in accordance with the principals of the present invention. Asshown, the SPE capital structure may include among the sources of funds,a plurality of tranches of debt instruments (e.g., Class A-1/A-2Revolving Notes, A-3 (term) Notes, Class B Notes, and Class C (discount)Notes), as well as an equity account. When a securitization inaccordance with the principles of the present invention is closed, thesedebt instruments are issued to investors in exchange for funded capitalas shown in column F on FIG. 22 (and to the lender as part of thepurchase price for the portfolio of distressed credit facilities), and,in the case of the Class A-1/A-2 Revolving Notes, unfunded commitmentsto contribute future capital, as shown in column G. Aggregate unfundedprincipal appears in cell B21 (i.e., column B, row 21) and is computedas the difference between aggregate loan commitments (cell B2) andaggregate funded principal (cell B3). This aggregate unfunded principal($150 million in the illustrated example) is to be funded from theUnfunded Revolver Discount Account (URDA) and also jointly from theClass A Revolving Notes availability and Class A Revolving ReserveAccount, as shown in cells B22 and B24 of FIG. 22.

The simultaneous equations which generate the Class A Revolving ReserveAccount amount, referred to above in connection with step 1148 of FIG.21D, represent constraints imposed on the capital structure illustratedin the spreadsheet of FIG. 22. More particularly, the capital structuremust be established such that the value in cell 122 is zero (subject tosmall rounding discrepancies, for example, 0.03% is the value in cell122 in the illustrative example). This condition, in turn, requires thatthe values in cells 14 (the percentage of the total Class A Notesrepresented by Class A-1/A-2 Revolving Notes) and 118 (the percentage ofthe total Class A Notes commitment represented by Class A-1/A-2Revolving Notes availability) are equal (subject to small roundingdiscrepancies, for example, a difference of 0.03% in the illustrativeexample) in order to keep Class A Revolving Notes and Class A Term Notesbalanced in the face of future funding requirements.

Default/Recovery Scenarios

The process 1096 (FIG. 18; step 202, FIG. 3) for specifyingdefault/recovery scenarios is now described in connection with theillustrative example in FIGS. 23A-23B. As shown in the illustrativeexample in FIG. 23A, calculations are made in step 1154 to determine:the amount of funded revolving loans; the proportion of the total loancommitments in the distressed credit facility portfolio represented byrevolving loan commitments; the proportion of the revolving loancommitments in the distressed credit facility portfolio represented byfunded revolvers; and the portfolio LIBOR interest spread. The amount offunded revolving loans is calculated as the difference between theaggregate revolving loan commitments and the aggregate unfundedrevolving commitment amount. The revolving loan commitment percentage iscalculated as the ratio of the revolving loan commitments to the totalcommitments expressed as a percentage; and the funded revolver (i.e.revolving loan) percentage is computed as the ratio of the fundedrevolvers to the revolving loan commitments, again expressed as apercentage. The portfolio LIBOR spread is calculated simply as thedifference between the weighted average contractual interest rate andthe LIBOR rate. A series of quarterly cash flow dates beginning sixmonths after the closing date of the SPE securitization and“days-between-dates (actual/360)” is established in step 1154 in theillustrated example.

Various information about the distressed credit facility portfolio andthe SPE securitization is accumulated in the illustrative example instep 1156 (derived from step 1108, FIG. 19), including: the closingdate, the series of cash flow dates, the aggregate loan commitments;aggregate term commitments; aggregate revolving loan commitments;aggregate funded term commitments; aggregate funded revolvers; aggregateunfunded portfolio amount, aggregate funded price; aggregate credit forunfunded commitments; portfolio LIBOR spread; and the weighted averagecommitment fee percentage. These amounts may be expressed in dollars oras percentages, as desired by the SPE collateral manager.

As shown in the illustrated example in FIG. 23B, the collateral managermay enter into field 1158 in the database model, information specifyingthe default/recovery scenario responsive to credit rating agencystresses, such as: a cumulative payment default rate; a targetpre-default revolver utilization percentage; a recovery rate forperforming principal; a recovery rate for defaulted principal; arecovery rate for deferred interest; a recovery lag (in months); aquarterly LIBOR step-up (or step-down); an indication of the quarter ofLIBOR adjustment; a principal amortization percentage for each paymentdate; a default loading pattern; and proceeds from pre-closing principalamortization and pre-closing interest payments. These terms are commonlyused and known to those of ordinary skill in the art. The values may bedetermined by the collateral manager based on historical experience,reference to published credit rating agency studies and criteria, orbased on the criteria provided by credit rating agencies in connectionwith the proposed securitization. A computation is made in step 1160 ofthe illustrated example to determine the “borrow-on-default” percentageas the product of the revolving loan commitment percentage and thedifference between the target pre-default revolver utilizationpercentage and the funded revolver percentage. The computation in step1160 is also made to determine the portfolio LIBOR spread as thedifference between the weighted average contractual interest rate oncurrent pay loans and the LIBOR interest rate. For each time period,calculations are also made to determine a cumulative amortization; acumulative default; a survival percentage (terms commonly used by andknown to those of ordinary skill in the art), and LIBOR.

Default/Recovery Scenario Cash Flow Model

The process 1098 (FIG. 18) for generating a cash flow model for thedefault/recovery scenario specified by the collateral manager via theprocess 1096 is described in more detail in connection with FIGS.24A-24D in the illustrative example. More particularly, as shown in FIG.24A, a computation is made in step 1162 to determine: an ending amountof performing commitment for each payment period by subtracting from thebeginning performing commitment for that period (which in the initialperiod is the difference between the initial total commitments andpre-closing amortization), the value of a variable AMORT and the valueof a variable DEFAULT, where, in the initial period, AMORT equals thepre-closing amortization, and in subsequent periods, AMORT is calculatedas the product of the amortization rate percentage and the differencebetween the initial total commitments and the pre-closing amortization,and where DEFAULT is equal to the product of the default-rate percentageand the difference between the initial total commitments and thepre-closing amortization. In step 1164 of the illustrated example, abreakdown of DEFAULT for each payment period is calculated. Inparticular, term loans re-classed as non-performing are calculated asthe product of DEFAULT and the term commitment percentage. In theinitial period, a slight variation is made in this calculation to takeinto account that the first payment period may be between four to sixmonths after pricing to account for quarterly pay loans; thereafter,payment periods would be three months. In step 1164, a computation isalso made to determine the initial funded revolvers re-classed asnon-performing as the product of the revolving loan commitmentpercentage and the DEFAULT amount calculated by step 1162. Calculationsare also made in step 1164 to determine the amount of new borrowingclassed as non-performing as the product of the borrow-on-defaultpercentage and the DEFAULT amount. Lastly, the commitment extinguishmentis also calculated in step 1164 as the product of the DEFAULT amountmultiplied by the difference of (i) 1 minus (ii) the difference of thefunded percentage minus the borrow-on-default percentage (i.e.,1−(funded percentage−borrow-on-default percentage)). There may be aslight variation in this calculation for the initial period of thesecuritization to take into account lags in the first payment period.

As shown in the illustrative example in FIG. 24B, a calculation is madein step 1166 to determine the amount of funded principal re-classed asnon-performing as the sum of term loans re-classed as non-performing,initial funded revolvers re-classed as non-performing, and new borrowingclassed as non-performing (i.e., the borrow-on-default amount). Theending funded performing principal for each payment period is calculatedin step 1168 in the illustrative example as the sum of the beginningfunded performing principal for each payment period and theborrow-on-default amount, less AMORT, less funded principal re-classedas non-performing. A calculation is made in step 1170 in theillustrative example to determine the amount of interest earned onfunded and performing commitments as the product of (i) the differencebetween the beginning funded and performing principal for each paymentperiod and the funded principal re-classed as non-performing, (ii) thesum of LIBOR for the time period and the weighted average margin for thetime period, and (iii) the actual day count divided by 360. The amountof commitment fee earned on performing, but unfunded commitments iscalculated in step 1172 in the illustrative example as the product of(i) the difference between the beginning performing commitments for eachperiod and the beginning funded and performing principal, (ii) theweighted average commitment fee, and (iii) the actual day count dividedby 360.

As shown in the illustrative example in FIG. 24C, the collectedprincipal is calculated in step 1174 as the product of AMORT and therecovery rate on performing principal. A calculation is then made instep 1176 of the illustrative example to determine the amount of fundedprincipal forgiven as the difference between AMORT and the amount ofcollected principal calculated in step 1174. A calculation is made instep 1178 of the illustrative example to determine the amount of endingfunded non-performing principal as the amount of beginning fundednon-performing principal, plus the amount of funded principal re-classedas non-performing, minus the amount of principal resolved, where theamount of principal resolved is the value of the principal re-classed asnon-performing for the recovery lag. For example, upon default a loan isassumed not to pay interest for a period (a “recovery lag”) prior tomonetization. Credit rating agency stress may assume this period to bein the range of 24 to 36 months. The layers of funded, butnon-performing principal and deferred interest thereon are determined instep 1180 in the illustrative example. Each such layer commences with“re-classed as non-performing” for that period, and interest on suchamount is compounded until the period in which the principal isresolved.

As shown in the illustrative example in FIG. 24D, a calculation is madein step 1182 to determine the amount of recovery of resolved principalas the product of the amount of principal resolved and the recovery rateon non-performing principal. Next, a calculation is made in step 1184 inthe illustrative example to determine recovery of deferred interest asthe product of the amount of deferred interest and the recovery rate ondeferred interest. The interest proceeds are calculated in step 1186 asthe sum of the amount of interest earned on performing fundedcommitment, the amount of commitment fees received by the SPE, and theamount of deferred interest recovered by the SPE. A calculation is madein step 1188 in the illustrative example to determine the amount ofprincipal proceeds received by the SPE as the sum of performingprincipal collected and the amount of recovery of resolved principal.

Overview of Waterfalls

The process 1100 (FIG. 18B) for simulating cash flow waterfalls inconnection with the default/recovery scenarios specified by the process1096, which also corresponds to the field 202 of FIG. 3, is nowdescribed in more detail in connection with FIGS. 25-39 in theillustrated example. More particularly, FIG. 25 in the illustrativeexample depicts an overview of the process of providing cash flowwaterfalls or payment sequences that carry out the securitization of thedistressed credit facility portfolio in accordance with the principlesof the present invention. More specifically, the collateral managerevaluates inputs for the capital structure and initial account balancesin step 1190 as described in more detail below in connection with FIG.26 and default/recovery scenario inputs in step 1192, as described inmore detail below in connection with FIG. 27. Thereafter, the cash flowwaterfalls or payment sequences are simulated by steps 1194 and 1196(FIG. 25). More particularly, for each payment period, funds areallocated in step 1194 in the illustrative example from various accountsin the SPE to various uses, including payments to providers of capitaland services to the SPE. Account balances are updated in step 1194 inaccordance with implementation of the cash flow waterfalls. This processis repeated for the cash flow waterfalls for each period in thesecuritization.

Waterfalls—Inputs

Exemplary inputs for an exemplary SPE capital structure (step 1190 ofFIG. 25) which may be used in implementation of the present inventionare illustrated in greater detail in FIG. 26 of the illustrativeexample. As shown, these inputs include: opening balances for variousaccounts of the SPE, such as loan commitments, funded principal,unfunded commitment, the Unfunded Revolver Discount Account (URDA) (step1126), the Senior Interest Reserve Account (step 1122), the SubordinatedInterest Reserve Account (step 1124), the Overadvance Reserve Account(step 1128), the Closing Expense Account (step 1128), the ProfessionalFees Account (step 1128), the Interest Rate Cap Account (step 1128), theExpense Account (step 1128) and a Cash Collateral Account which isdescribed below. These inputs also include opening balances for sourcesof capitalization of the SPE, such as Class A Revolving Notescommitments, Class A Revolving Notes funded principal, Class A TermNotes, Class B Notes, Class C Notes (face value and issue price), andequity of the SPE (step 1198).

The scenario input entry process of step 1192 (FIG. 25) is illustratedin greater detail in FIG. 27 in the illustrative example. As shown, thecollateral manager may evaluate scenario information including paymentdates for the various payment periods, and, for each period, day counts(actual/360), LIBOR rates, loan commitments, funded principal amounts,interest proceeds, principal proceeds, and borrow-on-default amounts.This data may be put into a database model for an SPE capital structureas indicated in step 1200 (FIG. 27).

Waterfalls—Revolver Funding Mechanism

Credit rating agencies' stress includes a theory that immediately priorto a default a borrower will draw down on its unfunded revolver.“Borrows-on-default” is the portion of the unfunded revolver anticipatedto be drawn down in connection with a default. As shown in theillustrative example in FIG. 28, “borrows-on-default,” represented by astep 1202, are funded from three sources. They are first funded fromamounts in the Unfunded Revolver Discount Account (URDA) (step 1204),and then, to the extent unfunded, from principal proceeds (step 1206),and then, to the extent still unfunded, on a pro rata basis fromborrowing under Class A Revolving Notes availability and the Class A-3Revolving Reserve Account (step 1208 (FIG. 28)).

Waterfalls—Operating Accounts

FIGS. 29A-29B illustrate exemplary accounts that may be used inconnection with the securitization described herein. These accounts mayinclude, as shown in the illustrative example in FIG. 29A, an InterestCollection Account 1210, a Principal Collection Account 1212, theProfessional Fees Account 1214 (which was established and initiallyfunded in step 1128), and the Expense Account 1215 (which wasestablished and initially funded in step 1128). These accounts may alsoinclude, as shown in the illustrative example in FIG. 29B, the ClosingExpense Account 1216 (which was established and initially funded in step1128), the Interest Rate Cap Account 1217 (which was established andinitially funded in step 1128) and a Cash Collateral Account 1218. TheInterest Collection Account 1210 (FIG. 29A) has an initial zero balancein the illustrative example, receives interest proceeds from loans andalso includes interest earned on cash held in numerous accounts,including the Interest Collection Account 1210 itself, the PrincipalCollection Account 1212, the Cash Collateral Account 1218 (FIG. 29B),the Senior Interest Reserve Account 1122 (FIG. 21A), the SubordinatedInterest Reserve Account 1124 (FIG. 21A), the Unfunded Revolver DiscountAccount 1126 (FIG. 21A), the Overadvance Reserve Account 1128 (FIG.21B), the Closing Expense Account 1216 (FIG. 29B), the Professional FeesAccount 1214 (FIG. 29A), the Expense Account 1215 (FIG. 29A), and theClass A-3 Revolving Reserve Account (step 1148, FIG. 21D). The PrincipalCollection Account 1212 (FIG. 29A) has an initial zero balance in theillustrative example, and receives principal proceeds from loans lessthe amount used to fund revolving loans or other unfunded commitments.The Professional Fees Account 1214 (FIG. 29A) is used to pay fees andexpenses of professionals (e.g., attorneys and advisors, etc.) hired bythe collateral manager in connection with management of the distressedloan portfolio for the SPE. Because of its ongoing usage, in theillustrative example (step 1226, FIG. 30A), the Professional FeesAccount 1214 is “topped off” (i.e., replenished or restored) to itsinitial balance ($1.6 million in the illustrative example) quarterly byadding to it from the interest proceeds waterfall, the principalproceeds waterfall and certain other accounts on quarterly paymentdates, subject to the limitation that no more than 25% of the initialbalance ($400,000 in the illustrative example) can be added to theaccount on any payment date and the ending balance in the account after“top-off” cannot exceed the initial balance funded on the closing dateof the securitization. The Expense Account 1215 (FIG. 29A) is used topay other fees and expenses (e.g., accounting and audit expenses)incurred by the SPE. Because of its ongoing usage, in the illustrativeexample (step 1224, FIG. 30A), the Expense Account 1215 is “topped off”to its initial balance ($250,000 in the illustrative example) quarterlyby adding to it from the interest proceeds waterfall, the principalproceeds waterfall and certain other accounts on quarterly paymentdates, subject to the limitation that no more than 25% of the initialbalance ($62,500 in the illustrative example) can be added to theaccount on any payment date and the ending balance in the account after“top-off” cannot exceed the initial balance funded on the closing dateof the securitization. The Interest Cap Account 1217 (FIG. 29B) is usedto purchase an interest rate cap on the Senior Interest Reserve Account1122 (FIG. 21A). The interest rate cap is a contract with a financialinstitution (the “counterparty”) that provides protection againstincreases in prevailing market interest rates above a preset rate (suchexcess, the “spread”). Under the interest rate cap in the illustrativeexample, the counterparty pays the SPE an amount equal to the spreadmultiplied by a notional amount, with such payments being made quarterlyon preset dates. In the illustrative example, the notional amount is theSenior Interest Reserve Account balance. The payments are deposited intothe Senior Interest Reserve Account to augment the size of the reservesto be sufficient to pay the interest on the Class A Notes, the Class BNotes and the Class C Notes for the allocated period (based on theanticipated default rates predetermined by the applicable credit ratingagencies) because the increased interest rates create a need for largerthan anticipated reserves.

Interest Proceeds Waterfall

Cash flow waterfalls or payment sequences for the Interest CollectionAccount 1210, the Principal Collection Account 1212, the Senior InterestReserve Account (waterfall initiation), the Unfunded Revolver DiscountAccount, the Cash Collateral Account, the Class A-3 Revolving ReserveAccount, the Senior Interest Reserve Account (waterfall completion), theSubordinated Interest Reserve Account, the Overadvance Reserve Account,and the Closing Expense Account are now described in more detail inconnection with the illustrative example in FIGS. 30-39, respectively.It should be noted that the dollar amounts and percentages shown in theaccompanying drawing figures and/or described herein are simplyexamples, and no limitation is intended thereby.

As shown in the illustrative example in FIG. 30A (step 1194, FIG. 25),the Interest Collection Account 1219 (i.e., the Interest CollectionAccount 1210 shown in FIG. 29A) is used to the extent of availableinterest proceeds to pay taxes, registration fees and filing fees of theSPE (step 1220). If the initial balance in the Interest CollectionAccount 1219 does not cover these fees and taxes, then any shortfall iscalculated in step 1220. If any funds remain in the Interest CollectionAccount 1219 following the payment of step 1220, then those funds areused to pay or reimburse accrued, but unpaid trustee, administration,and agency fees for the payment date, subject to a limit of 0.015% perannum (in the illustrative example) of the quarterly asset amount forthat payment date (step 1222). Again, the step 1222 also entailscalculating any shortfall in the available Interest Collection Accountproceeds for covering these fees. If any funds remain in the InterestCollection Account 1219, up to $62,500 (in the illustrative example) ofthose funds is transferred to the Expense Account 1215 (FIG. 29A) torestore the balance in that account to $250,000 (in the illustrativeexample). In step 1224 a calculation is made to determine any shortfallfrom this transfer. To the extent any proceeds remain in the InterestCollection Account 1219 following the step 1224, those funds are used topay, on a pro rata basis, any unpaid amount from prior periods and/orthe current period of the collateral management fee (which may becalculated, for example, as 1.0% annually of the annual asset amount inthe SPE), the replacement manager fee, and a transfer to theProfessional Fees Account 1214 (FIG. 29A) of sufficient funds to restorethe balance in that account to $1,600,000 (in the illustrative example),subject to a transfer limit of $400,000 (in the illustrative example) oneach payment date. Again, in step 1226 a calculation is made todetermine any shortfall in the Interest Collection Account 1219 to coverthese amounts. The priority of the payments described here is fairlystrict and not subject to much variation; provided, however, thatultimately waterfalls are the result of negotiations among thecollateral manager, noteholders and credit rating agencies.

As shown in the illustrative example in FIG. 30B, any remaining funds inthe Interest Collection Account 1219 are used to pay in step 1228, on apro rata basis, any unpaid amount from prior periods and the currentperiod of (1) Class A Notes interest at a per annum rate of LIBOR plus0.50%, (2) Class A Revolving Notes commitment fee at a per annum rate of0.25% on the unfunded balance, and (3) Class A Notes enhancement premium(i.e. amounts paid as premium for any “wrap policy” for the Class ANotes) at a per annum rate of 0.30% of the Class A Notes funded balanceand a per annum rate of 0.15% on the Class A Notes unfunded balance (allpercentages and rates are illustrative examples). Any shortfall in theamount of the Interest Collection Account balance 1218 to cover theseinterest payments is also calculated in step 1228. any remainingInterest Collection Account balance is then applied to any unpaid amountfrom prior periods and the current period of Class B Notes interest at aper annum rate of LIBOR plus 2% (step 1230 in the illustrative example).In step 1230, a calculation is also made of any shortfall if the balancein the Interest Collection Account 1219 is not sufficient to pay thisClass B Notes interest. Any remaining balance in the Interest CollectionAccount 1219 is then used to pay (subject to a cap of $200,000) (1)trustee and administration expenses exceeding limits as described aboveand, thereafter, (2) expenses not paid in full out of the ExpenseAccount 1215 (step 1232). Any remaining funds in the Interest CollectionAccount 1219 are then used to pay any unpaid amount from prior periodsand the current period of Class C Notes interest coupon at a per annumrate of 1.65% (in the illustrative example) for the duration of theperiod, and any shortfall in the Interest Collection Account proceeds tocover this Class C Notes interest is calculated in step 1234. Anyremaining balance in the Interest Collection Account 1219 is then usedto pay Class A Revolving Notes agent fees of $15,000 per quarter (step1236 in the illustrative example), and any shortfall is calculated instep 1236. After all of the foregoing payments are made from the balancein the Interest Collection Account 1219, any excess interest proceedsare paid into the Cash Collateral Account (step 1238) described below inconnection with FIGS. 34A-34B.

Principal Proceeds Waterfall

As shown in the illustrative example in FIGS. 31A-31B, the balance inthe Principal Collection Account 1240 (adjusted to reflect funding ofrevolving loans and other unfunded commitments and receipt of any excessamount remaining in the Closing Expense Account from the prior period)is used to the extent of available principal proceeds to pay certain“senior” expenses to the extent that those expenses have not been paidfrom the Interest Collection Account as described above (step 934, FIG.25). Specifically, in the illustrative example, these “senior” expensesinclude: (1) taxes, registration fees and filing fees of the SPE; (2)trustee and administration expenses; (3) Expense Account “top-off;” (4)collateral management fees, replacement manager fees, and a ProfessionalFee Account “top-off;” (5) Class A Notes interest, commitment fees andcredit enhancement fee; and (6) Class A Notes enhancement liabilities(step 1242). Remaining proceeds in the Principal Collection Account1240, if any, are used to reduce outstanding principal on Class A Notes(step 1244). Following this payment in step 1244, the outstandingbalances of Class A Notes are recalculated in accordance with paymentsmade. Thereafter, any remaining balance in the Principal CollectionAccount is used to pay unpaid Class B Notes interest (step 986), and toreduce outstanding principal on the Class B Notes (step 1248). Again, inthe event of payment of Class B Notes in step 1248, the outstandingbalances on Class B Notes are recalculated according to the amountspaid. Notwithstanding the foregoing discussion, in the illustrativeexample, principal paid on the Class A Notes, Class B Notes and Class CNotes will be paid in accordance with the strict priority of theprincipal proceeds waterfall, which requires payment in full of theClass A Notes prior to any payments of principal on the Class B Notes,and payment in full of the Class A Notes and the Class B Notes prior toany payments of principal on the Class C Notes.

As shown in the illustrative example in FIG. 31B, any balance remainingin the Principal Collection Account 1240 after the payment in step 1248is used to pay any unpaid amount of the minimum credit enhancement fee,which represents the deficiency of actual credit enhancement fees paidduring the duration of the Class A Notes commitments, together with anagreed-upon minimum credit enhancement fee (step 1250). Any remainingbalance in the Principal Collection Account 1240 is then used to covertrustee and administration expenses in excess of the limits specifiedabove and thereafter to cover expenses not paid in full from the ExpenseAccount, to the extent that these expenses were not paid from theInterest Collection Account 1219 (FIG. 30A), and any shortfall in thePrincipal Collection Account 1240 is calculated (step 1252). Anyremaining balance in the Principal Collection Account 1240 is then usedto pay Class C Notes interest remaining unpaid after application ofinterest proceeds (step 1254), and to pay unpaid Class A Revolving Notesagent fees (step 1256). Finally, any remaining balance or “excessprincipal proceeds” is paid into the Cash Collateral Account (step 1258)as described in more detail below in connection with FIGS. 34A-34B.

Senior Interest Reserve Account Utilization

As shown in the illustrative example in FIG. 32, the Senior InterestReserve Account 1260 is used to the extent of available Senior InterestReserve Account proceeds to pay “senior” expenses to the extent thoseexpenses were not covered by the Interest Collection Account 1219 or thePrincipal Collection Account 1240 (step 1262; step 1194, FIG. 25).Specifically, these expenses include: (1) taxes, registration fees andfiling fees of the SPE; (2) trustee and administration expenses; (3)Expense Account “top-off”; (4) collateral management fees, replacementmanager fees, and Professional Fee Account “top-off;” (5) Class A Notesinterest, commitment fees, and credit enhancement fees; and (6) Class ANotes enhancement liabilities. As mentioned above, in a securitization,as in the illustrative example, which includes a credit enhancement forthe Class A Notes, if at any time the SPE interest and principalwaterfalls and appropriate reserve account waterfalls are insufficientto pay principal and interest on the Class A Notes, or senior expensesof the SPE, then such amounts will be paid by the Class A creditenhancer (either directly, or by paying an equivalent amount to the SPE)and will be treated by the SPE as Class A Notes credit enhancementliabilities subject to future repayment by the SPE, and appropriateaccounting entries are made to reflect this treatment (step 1264). Thebalance 1266 in the Senior Interest Reserve Account following thesedisbursements (i.e., after utilization of the Senior Interest ReserveAccount) and before release of excess is represented in the illustrativeexample in FIG. 32 in step 1266. Further allocation of this SeniorInterest Reserve Account balance 1266 is described below in connectionwith FIG. 36.

URDA Balance

As shown in the illustrative example in FIG. 33, the balance in theUnfunded Revolver Discount Account (URDA) 1268 at the beginning of theperiod is used to fund revolving loan commitments (step 1270, step 934,FIG. 25) as described above in connection with FIG. 28. A computation ismade in step 1272 to determine the amount of excess URDA for each loanas the product of the amount of permanent commitment reduction for thatloan and (1-price) for the loan (in the illustrative example,(1-55%)=45%). This excess URDA amount for each loan is then released tothe Cash Collateral Account described below in connection with FIGS.34A-34B, and the amount of the release of excess URDA is deducted fromthe URDA balance in tandem with permanent releases of revolving loancommitments in step 1272 in order to arrive at the ending balance 1274of the Unfunded Revolver Discount Account.

Cash Collateral Account Waterfall

In the illustrative example, FIGS. 34A-34B illustrate the cash flowwaterfall or payment sequence from the Cash Collateral Account 1276. Asshown, the Cash Collateral Account 1276 is funded from: an InterestProceeds Account excess 1278 (FIG. 30B), a Principal Proceeds Accountexcess 1280 (FIG. 31B), excess URDA releases 1282 (FIG. 33), Senior andSubordinate Interest Reserve Accounts excesses 1284 (FIG. 32 and FIG.37, respectively), a Class A-3 Revolving Reserve Account excess 1286(FIG. 35), and an Overadvance Reserve Account excess 1288 (FIG. 38). Asillustrated in FIG. 34A, the balance in the Cash Collateral Account isused to the extent of available funds to transfer $1,250,000 (in theillustrative example) to the Overadvance Reserve Account (“OARA”) ineach of months 9, 12, 15, 18, 21, 24, 27, 30, 33 and 36 in step 1290(step 1194, FIG. 25). Thereafter, if proceeds remain in the CashCollateral Account, such proceeds are used to pay certain priorityexpenses, to the extent those expenses were unpaid by principal proceeds(step 1292). In particular, the priority expenses include: (1) taxes,registration fees and filing fees of the SPE; (2) trustee andadministration expenses; (3) Expense Account “top-off;” (4) collateralmanagement fee, replacement manager fee, and Professional Fees Account“top-off;” (5) Class A Notes interest, commitment fees and creditenhancement fee; (6) Class A Notes enhancement liabilities; and (7)Class B Notes interest expense. For so long as any Class A Notes orClass B Notes remain outstanding, a reserve amount ($15,000,000 in theillustrative example) is then retained in the Cash Collateral Account(step 1294).

As shown in the illustrative example in FIG. 34B, remaining proceeds(after retaining the $15,000,000 reserve amount in the illustrativeexample as described above) are used to pay preferred equity sharedividends (step 1296), and then to reduce outstanding principal on ClassA Notes (step 1298), thereafter recalculating outstanding Class A Notesbalances. Any remaining proceeds in the Cash Collateral Account 1276 arethereafter used to reduce outstanding principal on Class B Notes, againrecalculating outstanding balances on the Class B Notes (step 1300).

In the illustrative example, any remaining balance in the CashCollateral Account 1276 is then used to pay unpaid minimum creditenhancement premiums (step 1302), to reduce outstanding principal onClass C Notes, recalculating the outstanding balance on such Class CNotes (step 1304). Any remaining balance in the Cash Collateral Account1276 is then used to pay subordinated Class C Notes interest (i.e.,coupon interest in excess of 1.65% in the illustrative example) (step1306). Thereafter, the Cash Collateral Account balance, if any, is usedto pay, to the extent unpaid, trustee and administration expenses inexcess of the limits stated above, and then expenses not paid in fullfrom the Expense Account 1215 (step 1308). Any shortfall in the CashCollateral Account from those expenses is calculated in step 1308. Ifany balance remains in the Cash Collateral Account 1276, that balance isthen used to distribute preference share principal (step 1310), and thensupplemental management fees (step 1312). “Preference shares” must bethe last dollars at risk, not repaid until the Class C Notes have beenpaid in full. They are “quasi-debt-like” as they receive a dividendstream the total amount of which is capped ($22.0 million in theillustrative example), plus their face amount. The ending CashCollateral Account balance (including up to the $15,000,000 reserveamount retained in step 1294 in the illustrative example) (FIG. 34A) isrepresented in FIG. 34B in step 1314.

Class A Revolving Note Availability and Class A-3 Revolving ReserveAccount

In the illustrative example, FIG. 35 illustrates the disposition of thebalance in the Class A-3 Revolving Reserve Account 1316 for any period(step 1194, FIG. 25). The initial balance in the Class A-3 RevolvingReserve Account was determined in step 1148 (FIG. 21D). As shown, theClass A Notes funding requirement is computed by subtracting from theaggregate loan commitments at the end of the period the amount ofaggregate funded principal at the end of the period and the amount ofthe URDA after releases described above in connection with FIG. 33 (step1318). The Class A Notes funding requirement is then allocated betweenClass A Revolving Notes and Class A Term Notes in accordance with theirrespective Class A Notes allocation percentages (step 1320). The releaseof Class A Revolving Notes availability is then computed by subtractingthe A-3 (term) Notes allocation from the beginning-of-period Class ARevolving Notes availability (step 1322). The Class A-3 RevolvingReserve Account release is then computed by subtracting the A-3 (term)Notes allocation from the beginning-of-period Class A-3 RevolvingReserve Account (step 1324), and the Class A-3 Revolving Reserve Accountrelease is then used to reduce outstanding A-3 (term) Notes (step 1326)to thereby arrive at the end-of-period Class A-3 Revolving ReserveAccount balance 1328. After payment in full of all Class A Notes, anyexcess remaining in the Class A-3 Revolving Reserve Account is releasedto the Cash Collateral Account (step 1329).

Release of Senior Interest Reserve Account

In the illustrative example, FIG. 36 illustrates the allocation of theremaining Senior Interest Reserve Account 1330 (post utilization andpre-release of excess) (step 1194, FIG. 25) described above inconnection with step 1266 of FIG. 32. As shown in FIG. 36, the maximumsenior interest reserve is calculated as 18% (in the illustrativeexample) of Class A Notes commitments (step 1332). For so long as anyportion of the distressed credit facility portfolio remains outstanding,a minimum reserve ($10,000,000 in the illustrative example) is retained(step 1334). An amount of Senior Interest Reserve Account release iscomputed by subtracting the required reserve from the Senior InterestReserve Account 1330 (post-utilization, pre-release) (step 1336).Thereafter, if any portion of the distressed credit facility portfolioremains outstanding, this amount is released to a Subordinated InterestReserve Account 1342 (described below in connection with FIG. 37), andif, instead, the distressed credit facility portfolio is substantiallyextinguished, then the amount of release computed by the step 1336 isreleased to the Cash Collateral Account (step 1338). The end-of-periodbalance in the Senior Interest Reserve Account 1330 may then be computedby subtracting the amount of releases from the Senior Interest ReserveAccount balance (post-utilization, pre-releases) (step 1340).

Release of Subordinated Interest Reserve Account

In the illustrative example, FIG. 37 illustrates allocation of theSubordinated Interest Reserve Account 1342 (step 1194, FIG. 25). Asshown, the beginning-of-period balance in the Subordinated InterestReserve Account 1342 is augmented by any excess released to theSubordinated Interest Reserve Account 1342 from the Senior InterestReserve Account 1330 as described above in connection with step 1338 ofFIG. 36 (step 1334). From the augmented balance in the SubordinatedInterest Reserve Account 1342, unpaid Class B Notes interest is paid(step 1346). The maximum subordinated interest reserve is thencalculated as a percentage (30% in the illustrative example) of theClass B Notes outstanding principal balance (step 1348). For so long asany Class B Notes remain outstanding, a minimum subordinated interestreserve ($10,000,000 in the illustrative example) is retained (step1350). The amount of subordinated interest reserve release is thencalculated by subtracting the required reserve from the SubordinatedInterest Reserve Account (post utilization, pre-release) (step 1352),and any excess subordinated interest reserve is released to the CashCollateral Account (step 1354) as described above in connection withFIG. 34A. The ending balance in the Subordinated Interest ReserveAccount 1342 is then calculated by subtracting the amount of thereleases from the Subordinated Interest Reserve Account balance(post-utilization, pre-releases) (step 1356).

Overadvance Reserve Account

In the illustrative example, FIG. 38 illustrates allocation of theOveradvance Reserve Account (“OARA”) 1358 (step 1194, FIG. 25). Theinitial balance in the Overadvance Reserve Account was determined by thecollateral manager and funded on the closing date of the securitization($7.5 million in step 1128 (FIG. 21B) in the illustrative example). Thecollateral manager also determines a maximum amount for the OveradvanceReserve Account based, for example, on the size and characteristics ofthe distressed commercial loan portfolio and the prior experience of thecollateral manager, ($20 million in the illustrative example). As shownin FIG. 38, the beginning balance in the Overadvance Reserve Account1358 is reduced throughout the period as disbursements are made, asnecessary, to fund debtor-in-possession (DIP) loans andlast-in-first-out (“LIFO”) loans (step 1360) and is augmented throughoutthe period by periodic collections of principal and interest on the DIPloans (step 1362) and by additional funds received from excess proceedsin the Cash Collateral Account on certain payment dates (step 1364) (inthe illustrative example, $1.25 million in months 9, 12, 15, 18, 21, 24,27, 30, 33 and 36 as shown in step 1290 (FIG. 34A)). The balance in theOveradvance Reserve Account 1358 is also reduced by the release ofexcess over the maximum amount of the Overadvance Reserve Account ($20million in the illustrative example) to the Cash Collateral Account onpayment dates as described above in connection with the step 1288 ofFIG. 34A (step 1366). The ending balance in the Overadvance ReserveAccount is represented in the illustrative example by step 1368 in FIG.38.

Closing Expense Account

In the illustrative example, FIG. 39 illustrates allocation of theClosing Expense Account beginning balance 1370 from which payment ofclosing expenses throughout the period is deducted (step 1372) (step1194, FIG. 25). In step 1374, six months after the closing date of thesecuritization the remaining funds in the Closing Expense Account arereleased to the Principal Collection Account 1240 as described above inconnection with FIG. 31A (step 1114).

The foregoing description is for the purpose of teaching those skilledin the art the best mode of carrying out the invention and is to beconstrued as illustrative only. Numerous modifications and alternativeembodiments of the invention will be apparent to those skilled in theart in view of this description, and the details of the disclosedstructure may be varied substantially without departing from the spiritof the invention. Accordingly, the exclusive use of all modificationswithin the scope of the appended claims is reserved.

1. A securitization method, comprising the steps of: (a) selecting aportfolio of loans of one or more institutions, each loan having acorresponding borrower and involving at least one obligation of thecorresponding borrower to make a payment to the lending institution,wherein the portfolio of loans includes at least 30% distressedcommercial loans and wherein the loans are selected so that theportfolio meets predetermined criteria of one or more selected creditrating agencies: (b) establishing a bankruptcy remote special purposeentity (“SPE”) as an investment vehicle; (c) designing a capitalstructure for the SPE configured so that all of the securities above theequity or equity-like tranches issued by the SPE upon closing of thetransaction are eligible to receive investment grade credit ratings fromsaid one or more selected credit rating agencies; and (d) arranging forthe conveyance of the portfolio that includes the distressed commercialloans to the SPE so that a synthetic asset pool including the distressedcommercial loans is created in the SPE backing its securities, thesynthetic asset pool emulating the cash flow and recoverycharacteristics of a portfolio of performing credit facilities.